The Future of Financial Regulation Vedat Akgiray Chairman, CMB 03.07.22 1
The Future of Financial Regulation
Vedat AkgirayChairman, CMB
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2007 - 2009 Story of Finance
Global macro - imbalances 10–15 years of current account surpluses in the
east and deficits in the west In the east: savings > investments risk-free
western government bonds decreasing real rates (1 – 2 %) Rapid growth in credit markets (in emerging markets and
sectors) Wild search for higher yields
Financial innovation (CDO, credit derivatives ……. CDS etc) CDS volume of $62t in 2008!
Most of “new credit” is within the financial sector !
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The Crisis Did not happen out of nowhere…
In 1985-1995, more than 1,000 S&Ls went under Enron, Tyco, WorldCom… scandals and bankruptcies The 1995-2001 dot.com baloon and its eventual burst
(prices cannot increase all the time!) LTCM’s failure in 2000 (debt / equity > 25) Russian, Asian and similar “small” crises Madoff event (a huge Ponzi scheme managed by 3
accountants!)
There were signals of warning but they were much ignored
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The textbook says…
“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Adam Smith (Wealth of Nations)
“Self–interest” + free markets + deregulation = economic welfare
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Wall Street
“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of evolutionary spirit. Greed in all of its forms, greed for life, for money, for love, knowledge has marked the upward surge of mankind…..” Gordon Gekko
Greed self - interest….. is what we have been teaching for decades
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A few excerpts
“I hope … that you will find the doctrines of Adam Smith are not to be taken in the form in which your professors are explaining them to you.” J. Robinson (2007)
“For it is the irony of the market system that while its very success depends on harnessing the power of self-interest, its very sustainability depends upon people’s willingness to engage in acts that are not self-interested.” L. Summers (2003)
“We have always known that heedless self-interest was bad morals; we now know that it is bad economics.” FDR (1937)
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The non – economics story Uncalculated greed for more money and
success Both in businessmen and also regulators
Forgotten common sense (“boşver, bir şey olmaz!”)
“Regulatee” >> Regulator Comfort of mathematics, models, algorithms
etc “wisdom on vacation”
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What should we do?
1. Sustainability of maximum self – interest in the long-run sometimes requires short-term sacrifices
2. The probability of “something being wrong” in consistently and continually very high profits is very high common sense / experience
These cannot be ascertained through regulation. At its best, regulation can point to a market mechanism with its own self-discipline.
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2007 – 09 Lessons for the Regulator The crisis is not due to lack of regulation, but
to poorly designed and enforced regulation Regulatory gap between public markets and
private markets Regulation shaped by historical crises and not
by its own objectives
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All due to:•lack of information, or •delayed use of information
Objectives of Financial Regulation Price stability (via monetary policy) Financial system stability (management of
systemic risks) Protection of investors and confidence in the
financial markets
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To – Do List Reform of corporate governance, making
managers accountable and responsible Managers of all financial institutions /
intermediaries Managers of corporations
Protection of small investors through Enhanced disclosure and competition Persuasion to invest in portfolios
Narrow the regulatory gap between public markets and private markets
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The New Regulatory System Enhanced risk management covering not only
the financial industry but also using feedback from the real economy
The rules of regulation and supervision should be enforced based on market parameters and triggers (CDS prices, early warning signals, information indexes etc.) forward-looking regulation
A new architecture where one agency is held responsible for one objective and a board to coordinate these agencies
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