Former Central Bank of Ireland Director tackles causes of financial crisis

05 March 2013

The Foundation for Law, Justice and Society held a workshop last week entitled New Questions in Regulation, at which Max Watson, a former Director of the Central Bank of Ireland and senior official of the International Monetary Fund, headed an expert panel to assess the fallout of the financial crisis and propose new regulatory approaches to tackle the underlying causes.
 
At the workshop, held at Wolfson College on 1st March as part of the FLJS programme on Regulation, Max Watson revisited the notion of regulatory capture, in which regulators were ‘captured’ by the financial services industry they were supposed to be monitoring, such that industry interests were served at the expense of the public interest. Watson, also a board member at FLJS and Director of the Political Economy of Financial Markets Programme at the European Studies Centre, explained that, “In the financial sector we’ve seriously trespassed against the public interest in the last two decades.”
 
The workshop panel featured a number of leading regulatory experts, including Professor Robert Baldwin from LSE, who outlined the fundamental issues in Max Watson’s thesis, showing that there were a range of factors – economic, ideological, political, and technological – which were conducive to regulatory capture. Ideologically, there was inflated belief in the virtue of the market and non-intrusive self-regulation, while the ratings agencies and politicians became increasingly incentivized to promote economic boom at any costs, which often led to excessive risk-taking.
 
The argument put forward showed a complex picture of interacting influences rather than any simple binary notion of capture, with the ‘race to the bottom’ caused by global competition and the ‘revolving door’ of staff moving between Wall Street and many regulatory bodies cited as two key reasons behind regulatory failures.
 
Following discussion of the argument from the panel, Dr Chris Decker from the Regulatory Policy Institute presented his assessment of the lessons to be drawn from regulation of the utilities sector over the past three decades. Following the transfer of utilities to the private sector, provision of essential services such as water, gas, electricity, and telecommuncications was effectively held by monopolies, making regulatory oversight of the sector particularly important, as has been seen in the recent outcry over BP's rising profits alongside increasing fuel bills.
 
Dr Decker and his fellow panellist Dr Karen Yeung explored the problems faced by this sector, including the problem of multiple, conflicting objectives and duties which make regulatory decision-making more complex and less transparent. Among the lessons drawn from the analysis, Dr Decker advocated co-regulatory structures and industry codes, but warned against applying wholesale regulatory models from industrialized countries to developing countries, as is being increasingly advocated by the World Bank and IMF.
 
The workshop was held before an audience of academics, solicitors and representatives from the Department for Business, Innovation & Skills, who were invited to question the panel after each session. The concluding discussion identified a number of new questions, to be explored at future workshops.
 
The next workshop in this programme, entitled Economic Rights and Regulatory Regimes: Is there still a ‘right’ to water? will be held on 19th March. Visit the Event page for further details and registration.
 
Podcasts of the discussion can be downloaded from the links on the right, and a policy brief by Max Watson will be published over the coming weeks.
 
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