Brooklyn Law School hosted a symposium that brought together academics and lawyers practicing in the U.S. and the E.U. to talk about the characteristics of the financial crisis on both sides of the pond, and to exchange proposals for regulatory reform to minimize systemic risk in order to avert another crisis.
The talks focused on three broad themes: whether another crisis will better be averted by less regulation or more, whether regulation should be industry-driven or governmental, and whether the regulatory body should be national or international.
The first of three panels of the day-long event considered current “proposals to restructure financial regulation and to enhance the responsibilities of financial regulators.” The second examined European and American state aid in the financial sector. The third panel, consisting of former Directors or Commissioners of the U.S. Securities and Exchange Commission, discussed ways that regulation could prevent another meltdown of the entire financial system.
The symposium was co-sponsored by the Dennis J. Block Center for the Study of International Business Law, the Brooklyn Journal of International Law, and the Centre for Commercial Law Studies, Queen Mary College, University of London. It was presented in partnership with the Securities and Exchange Commission Historical Society.
Less Regulation or More?
Commentator Peter J. Wallison of the American Enterprise Institute questioned the panelists’ instinct to treat the problem of systemic risk with more regulation. By bailing out large institutions, Wallison said, the government had created a list of companies the market overvalues because it expects them to be “too big to fail.” He asked why it is that every time regulators fail, we give the regulators more power? His was the minority view of the day, however. Professor Eugenio Ruggiero of the LUISS Guido Carli in Rome, Italy, echoed most of the presenters’ view that “before regulators fail, it is the private market that has made mistakes.”
Industry versus Governmental Regulation
Having decided that the way to avert another financial crisis is more or different regulation, the panelists examined what that regulation might look like in the future. BLS Professor Roberta Karmel summarized the consensus among the symposium participants that current administration proposals for regulatory reform will not prevent another collapse.
Two panelists suggested new roles for federal agencies. Professor Karmel suggested that the Government Accounting Office monitor the Federal Reserve Bank’s decisions, as that might give the Fed more “backbone,” enabling it to stand up to financial players. Professor Arthur Wilmarth Jr. of the George Washington University Law School suggested an insurance fund overseen by the FDIC.
Other panelists saw problems with these new roles. In the view of Annette L. Nazareth, a Partner at Davis Polk & Wardwell LLP, central banks should be the systemic risk regulators, as has always been the case. The SEC, she said, does not have the statutory authority to regulate players such as ratings agencies, which might be a large source of systemic risk. Edward F. Greene, a Partner at Cleary Gottlieb Steen & Hamilton LLP, said that to improve the quality of U.S. regulation, the focus should be on giving regulators under the current system better training, pay, and incentives.
Three presenters gave perspectives on current E.U. reforms. Professor Ruggiero noted that significant government ownership and control of financial institutions has long been the norm in Europe. Professor Georges Cavalier of the Université Jean Moulin in Lyon, France, described the current French approach, which makes use of subordinated government bonds and preferred shares to prop up ailing companies. Professor Takis Tridimas, of the Center for Commercial Law Studies, Queen Mary College, University College London, said that the financial crisis is an opportunity to coalesce support around E.U.-level financial regulation. The panelists questioned how well foreign approaches would work for the U.S. situation, however, given cultural differences.
Although most of the panelists focused on governmental regulation, one proposal took a very different tack. Professor Saule T. Omarova of the University of North Carolina at Chapel Hill suggested that self-regulation of the financial services industry might be the wave of the future. Professor Wilmarth suggested that this approach might work well in the Over-the-Counter derivatives context, but that in the larger market, government regulation will still be necessary.
National versus International Regulation
Mr. Greene said that there is an international consensus that regulation will consist of parallel national reforms rather than a supranational regulatory institution. Commentator William F. Kroener III, Counsel at Sullivan & Cromwell LLP, however, suggested that a supranational approach to financial regulation was a paradigm not to be ignored in the current discussion. He recalled the example of the International Swaps & Derivatives Association, Inc. (“ISDA”), but acknowledged that such a model implies concerns of ring-fencing, where national regulators might block assets from the international agency’s reach.
Professors Roberta S. Karmel and James A. Fanto organized the symposium in cooperation with Professor Takis Tridimas. Papers from the symposium will appear in the Spring 2010 issue of the Brooklyn Journal of International Law.