Reforming the Financial Regulators

In “Reforming the Financial Regulators,” a chapter in Prosperity Unleashed: Smarter Financial Regulation, published by the Heritage Foundation, Mark Calabria, Norbert J. Michel, and Hester Peirce argue that financial regulation should establish a framework for financial institutions based on their ability to serve consumers, investors, and Main Street companies. This view is starkly at odds with the current macroprudential trend in regulation, which places governmental regulators—with their purportedly greater understanding of the financial system—at the top of the decision-making chain.

  • There is no perfect structure for the financial regulatory system, but design affects how well regulation is carried out, so regulatory re-designers should proceed with care.
  • The current trend of regulatory homogenization—the shift toward uniform bank-centric regulation implemented by one “super regulator” at the international level—threatens to impair the effective functioning of the financial system.
  • Regulatory reform is needed, and it should be rooted in a recognition that financial market participants and their regulators respond to incentives in the same way that participants in other markets respond.
  • Greater accountability can be introduced, for example, by subjecting financial regulators to appropriations and implementing a commission governing structure.
  • Other key reforms include consolidating related powers in one regulator, removing authorities from agencies ill-equipped to perform them, and revamping processes to ensure appropriate accountability for, and public input in, rule-making.

Read the full chapter here.