Some Regulatory Concerns; and An Incentive Structure for Financial Regulation

Charles A. E. Goodhart

Swiss Journal of Economics and Statistics (SJES), 1996, vol. 132, issue IV, 649-650

Abstract: Barings and Daiwa were brought low by control failures in capital market operations in locations far from Head Office. This dramatically re-emphasized both the increased extent of globalisation of financial intermediaries, and the growing integration of (previously often separated) banking, securities market business, and, prospectively, insurance. Against this background, does the present structural organisation of national financial regulation, largely based on historical institutional divisions, still make sense? If not, how should such regulation be reorganized and restructured, at least in principle, since in practice national traditions, histories and political considerations will largely determine the outcome? This is the main question posed by the paper "Some Regulatory Concerns". The growing complexity of such integrated financial intermediaries makes it increasingly difficult for the authorities to impose, or to monitor, "appropriate" rules on the regulated ex cathedra; one rule fits all. One lesson of Barings and Daiwa is not that the authorities should do much more, but rather that public expectations of what is sensibly possible from the supervisors have become grossly exaggerated. There is really no alternative to placing more weight on internal managerial risk management. But if so, how can the incentive structure be best developed to encourage such internal management to be efficiently undertaken. This is the main subject of the second paper here.

Date: 1996
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