Regulation, Taxation, or True Effective Enforcement?

    Regulation's efficacy and methods are not a mystery buried in some ancient tomb. It consists of little more than channeling people’s most utilitarian behaviors. Regulators can basically choose to punish, award, or charge the actors in the marketplace to reach their regulatory objectives. Rather than regulate under the assumption that every market actor will try to please the regulators by behaving obediently and with a conscience, most people choose to believe punishment and proper enforcement are more expedient.

    While I am not attempting sanctimonious irony here, human beings know what the right things are to do rather than actually doing the right things. We know enforcement mechanisms are the foundation to an effective regulatory agency, we just can’t stop promulgating lengthy rules while at the same time collectively ignoring how to make sure those rules are adhered to. And such problems are even more serious in the financial regulatory perimeter. More complicated, lengthy, and annoying regulations usually mean we are now facing a “regulatory malfunction” problem. The Dodd-Frank Act itself is at least a voluminous 800 pages (the pages vary in quantity depending on what version you choose), let alone the pages of rules that all the financial regulators in the United Stated are required to propose under this Wall Street Financial Reform Bill.

The Moral Solution to the Floating Cloud-- Restoring Trust, Honesty and Prudence in Contemporary Financial Regulation

    Financial scandals, or to put it precisely and more definitionally exact, financial crimes, are fraught in today’s global financial market. Although the line between fraud and excessive risk-taking behaviors is somehow blurred in the financial fraternity, these kinds of misconducts are transparent to the rest of the world outside of the fraternity. Are you comfortable with the recent Swiss bank trader scandal, where a rouge trader in London in the UPS AG’s investment banking division incurred $2 billion of losses that basically lead the firm’s third-quarter financial statement into the red? Or do you think it’s just for Goldman Sachs, the largest and arguably most experienced investment bank in the world, to create an CDO (known as Hudson Mezzanine funding 2006-1) in which the bank cherry-picked all the assets portfolios then sold it to investors, while at the same time making a whopping $1.35 billion profit by betting against the CDO? Simply put, performing a rouse, making money while duping their trusting, unsuspecting, clients.

    All these recent happenings above lead us to a core question: Do we still have trust, honesty, and prudence in our financial market, and if the answer is nay, how do we restore or redeem those virtues and values into our financial regulatory reform? Other than traditional prudential regulation, the global regulators pay more attention to an area in which the ethical practices have been ignored for a long time, that is, the “Market Conduct Regulation”.

Regulating the Shadow Banking System

    The core mission of Bank Regulation is, in my point of view, to mitigate the systemic risk to the extent that everyone in the world can afford the cost of another financial crisis. Maybe a bit pessimistic, however I do subscribe to the belief that we cannot stop the current financial crisis from happening. What the regulators and all the market participants can do basically is to mitigate the scale of them and foresee them as early as possible. This is no time for myopia. Clarity of vision is essential.

    The recent global financial reform efforts that were proposed by the G20 Financial Stability Board, the U.S.A Dodd-Frank Act, and the UK Independent Commission on Banking, all reveal a clear and common tendency: to regulate those financial conglomerates that operate both in the traditional banking paradigm and via non-traditional banking activities.