It wasn’t just banks, brokers and markets that failed in the financial crisis, regulators failed, too, and fixing their failures doesn’t just mean new rules, it also requires regulatory courage.

“In 2008, the global financial system failed the test. The financial regulatory system failed the test. So many people all over the world who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial actors,” observed Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, in his remarks during a panel discussion Thursday at the annual conference of the International Organization of Securities Commissions in Montreal.


Gensler pointed to a number of actions that regulators must take in response to the crisis, including bringing comprehensive regulation to derivatives dealers, and shifting standardized products onto exchanges and into clearinghouses.

Just as importantly, Gensler stressed, regulators and politicians must not give into pressures from various industry factions for exemptions from these requirements. “Trading and clearing requirements will be only as effective as they are comprehensive,” he said.

“Regulators and legislators across the world should resist attempts to add exemptions and loopholes to these much-needed protections.”

This call for regulatory courage was echoed by Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets, who also observed that regulators around the world have suffered from a shortage of independence and accountability. There has long been political and commercial pressure for “light touch” regulation in many countries, he said, and he lamented that regulators haven’t done enough to push back against this and guard their independence.

At the same time, he suggested that regulators need to be held more accountable for their actions, or inaction, in the crisis. While regulators are primarily accountable to elected officials, he suggested that it’s also useful to have a board of directors to provide oversight of the regulators, and that regulators should welcome regular outside audits of their work (not just when failures happen).

Moreover, he added regulators also need to strengthen their “informal line of accountability to the public, consumers and investors”, which he noted are often much less organized and more poorly funded than industry interests. “Investors around the world unite, and organize yourselves,” he said, invoking the words of Karl Marx.

While none of the panelists took up Hoogervorst’s demand for more accountability, they did endorse his call for independence from political intervention. U.S. Securities and Exchange Commission chairman, Mary Schapiro, said that the best kind of political interest in regulation is the interest in preserving a strong independent authority, and she added that the SEC is largely free of government interference.

Nevertheless, Hoogervorst said he’s skeptical about the prospects for real regulatory reform. He said that the financial industry should be “scared as hell”, and it is not.

In particular, he questions the appetite for reform of the OTC derivatives markets. He also noted that politicians are susceptible to warnings from the industry that tougher capital requirements and leverage limits will stall economic growth. Most important, he argued that there’s been no serious effort to tackle moral hazard and the problem of financial institutions that are too big to fail by considering intervention to limit the size of firms. Simply creating a resolution authority to help unwind a failed financial firm doesn’t seem very realistic in practice, he said. Instead, policymakers should be preventing firms from getting too big in the first place, he suggested.

IE