Monday, April 7, 2008

Gaping Hole

"Europe suffers from a gaping hole in its financial supervision." So says Nicolas Véron. The European economic environment is more benign than the American at this point, he argues, but the European financial system is more fragile because of cross-border bank mergers and inadequate national-level supervision.

Meanwhile, Alan Greenspan believes that those who believe in regulation of the financial system are whistling past the graveyard.

Aside from far greater efforts to ferret out fraud (a long time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent. How we otherwise explain how the FSA, whose effectiveness is held in such high regard, fumbled Northern Rock? Or in the US, our best examiners have repeatedly failed over the years. These are not aberrations.

Cheery. And this is from the system's greatest defender.
P.S. Yves Smith isn't buying it.


Leo said...

I think Greenspan's comment re the Northern Rock debacle and the FSA's alleged effectiveness is a bit rich.

The FSA was held in 'high regard" for its light touch regulation. Genius Greenspan obviously forgot that a consequence of Sarbanes Oxley was to prop up the London Market to the detriment of New York.

Another fine statement from the good man to whom we owe the era of cheap money and leveraging that provoked the financial mess the world is now in.

Anonymous said...

Greenspan is really blowing smoke. Most of the trouble derives from the fact that the derivative activity has been totally unregulated and therefore has absolutely no transparency.