How to design market-friendly regulation (Nobel)

It's good news for all smart regulators when the Nobel prize for economy is given to an expert who has devoted part of his research to the negative impact of regulation on economic activity, chiefly by regulatory interference with markets, and offering solutions.

An article in last week's Economist (18 October) examines Mr Tirole's contribution under the title "It's complicated" (one of the laureate's favorite phrases). "Making sure companies compete fairly is a tricky business. The firms being regulated know far more about their business than those doing the regulating; bureaucrats can easily end up being too heavy-handed or too lax. On October 13th Jean Tirole, a French economist at the Toulouse School of Economics, was awarded the Nobel prize in economics for his work on this conundrum—"industrial organisation", in the jargon."

Empowering and overseing economic regulators (India)

An interesting update on regulatory reform in India is provided by an article by the India Times dated 13 Dec. (extract) "The government has given its go ahead to the proposed Draft Regulatory Reform Bill, 2013 which aims to make regulators across key infrastructure sectors accountable to the Parliament besides giving them power of licensing."The Prime Minister's Office gave its go-ahead to the bill last week. The bill is now up for consultation with various stakeholders and once it is finalised it may be taken up in Parliament during the budget session," a senior official told ET, requesting anonymity. The bill aims to fill a lacuna since India does not have a law to monitor the functioning of a large number of regulatory authorities existing in the country. The draft bill will apply to key sectors such as electricity, oil and gas, coal, telecommunications and internet, broadcasting and cable television, posts, airports, ports, waterways, railways, mass rapid transit system, highways and water supply, and sanitation." The overall operation of the regulator will be subject to scrutiny by the Parliament on a yearly basis. 

Three days later, the Indian Express makes a unenthusiastic assessment of this development: "Given that the government hasn't been able to muster the courage to bring its regulatory reform bill to Parliament for the last four years, it is difficult to see how it will happen this time around, though the bill is now to be circulated among ministries for their comments. At its heart, the bill seeks to take away from ministries the discretionary powers to award and cancel licenses, and plans to give them to professionally run regulatory commissions which, as is the case today, will have appellate tribunals to ensure that those unhappy with the decisions get a chance to appeal them."

IMF seminar on goblal regulatory developments

From an IMF press release dated August 31, 2012:
"The scope and intensity of the recent financial crisis, and the significant risks posed by financial institutions viewed as too important to fail, have brought to the fore the importance of strengthened financial sector regulatory reform to make the financial system safe. In this context, the IMF organized today a one-day seminar at the IMF-Singapore Regional Training Institute to take stock of progress on refining the regulatory framework and to define the current challenges in the design of the reform agenda, particularly in the Asian context.The seminar—titled Evolving Financial Regulatory Framework—is part of an extended series of events in advance of the October 2012 IMF/World Bank Annual Meetings in Tokyo, Japan. Panelists and participants, who included officials from central banks and regulatory agencies in Asia, private sector representatives, academics, journalists and IMF staff, discussed key issues in global regulation pertaining to both banks and capital market intermediation. They also discussed how the Asia-Pacific region is prepared to deal with the changes envisaged in the international regulatory framework as well as the future directions and implications for the financial system in the region.
Participants agreed that the regulatory reform agenda was still a work in progress and highlighted some of the implementation challenges and unintended consequences of regulation that may arise. Issues that drew particular attention were related to the impact of new capital and liquidity regulations; supervision and resolution of systemically important financial institutions (both banks and nonbanks); home-host cooperation; potential extra-territoriality arising from national initiatives; and implications from new regulation on capital market-related intermediation."

Update on international regulatory cooperation

In times of economic turmoil, there is an increased risk that governments will be tempted to engage in "regulatory competition" and use regulation to promote national interests in contravention with their international commitments, and to give a temporary boost to competiveness. The risk seems greates in the area of financial services, as a number of countries like the US adopt tough financial reforms to reassure their citizens that they are proactive in dealing with financial instability and speculation. In some cases, there can be consequences for foreign firms operating on their markets, and even abroad. An article on Reuters.com of two days ago summarizes the current tension under the catchy title "ET, the new alien scaring global markets" where ET stands here for "extraterritoriality", or legal effect beyond borders of a national law. The article shows the risks of regulatory competition, and the need for international regulatory cooperation (IRC), or coordination, to avoid negative economic effects.
The European Union provides a good forum to broach these sensitive issues with major economic competing blocs such as the US and Japan. See the DG Enterprise page on IRC which reports on EC cooperation with a number of governments around the world to remove regulatory barriers viewed as a significant impediment to trade and investment. With the US for instance, "regulatory cooperation is an important tool to helping dismantle existing regulatory barriers and prevent new ones from emerging. Since the development of the EU-US Guidelines for Regulatory Cooperation and Transparency, Regulatory authorities on both sides aim at achieving greater convergence of technical rules through a number of sectoral and methodological regulatory dialogues. Since its inception in 2005, the High Level Regulatory Cooperation Forum has met regularly to focus on key regulatory issues of common interest and to facilitate the exchange of best regulatory practice across sectors." See previous post on EU-US regulatory dialogue
Following a similar initiative from the Commission, the UK Finance Minister George Osborne wrote to B. Bernanke (Federal Reserve) on 23 January to ask for regulatory dialogue "aimed at minimising any unintended consequences of regulatory reforms on either side of the Atlantic."
A good presentation of the US point of view can be found in a 2010 speech by the U.S.Securities and Exchange Commissionner who explored the history, the forms, the advantages and the limits of IRC in promoting efficient capital markets.
Another particularly necessary area for IRC is the cooperation about collective investment schemes (CIS), but it seems to be fraught with difficulties, as explained in an article of the International Financial Risk Institute (IFRI)"To date, a uniform and consistent approach to the global regulation of CIS has not been pursued by regulatory authorities. It is therefore important in this climate for regulators to develop strategies to deal with this increased global activity in order to improve their collective oversight of the markets. If regulatory authorities chose to ignore the current trend that cross-border activity is increasing, they run the risk of failing to effectively regulate their markets and decreasing investor protection. Alternatively, if regulators accept that globalisation is a permanent feature of the managed funds industry, they should consider ways of improving their oversight of the markets. The incentive for pursuing this approach is that a co-ordinated harmonised approach to international regulatory co-operation should promote and strengthen the securities markets globally, increase investor confidence, attract investment, as well as assist the mutual flow of business."
The issue of IRC was raised at the OECD conference in October 2010on the future of regulatory policy, and a break-out session was devoted to the rationale for IRC (see summary of discussion). The theme was recently incorporated in the Recommendationsfor Regulatory Policy and Governance of OECD as part of quality regulation: "In an increasingly globalised economy, international regulatory co-operation must become integral to systemic risk management and long-term policy planning. Governments should take into account relevant international regulatory settings when formulating regulatory proposals to foster global coherence" (draft under discussion). OECD will be further exploring how to share national best practice in this new workstream of regulatory governance.

IMF boss renews call for RR

Regular readers of this blog must have noticed that we have up to now desisted from commenting on one of the major industries constantly under scrutiny and proposed for regulatory reform: the financial sector. This is a deliberate omission. Regulatory Reform as tackled in this blog is a horizontal set of institutions, policies and tools that can be applied in most sectors of the economy. It is up to regulators in each sector to make the best use of the principles. But to avoid leaving such a major gap in our coverage, we will henceforth report the most stimulating news in regulatory reform of the financial markets, starting with Monday's declarations by Christine Lagarde, the managing director of the IMF. "Better regulation of the financial sector remains critically important in the years ahead to make the financial sector safer and more stable, and to put the industry back in the service of the real economy," she said . Ms Lagarde cautioned against the inconsistency of implementation.

Re-regulation back on the agenda for trade contracts

We BR experts have been working largely on the assumption that there was too much regulation around, especially on business. We always remember however that BR does not mean deregulation, but more relevant and efficient norms. The economic crisis has highlighted the vulnerabillity of our economies to unchecked speculation, which may be promoted in the absence of appropriate regulation. Recents events in Greece, though more structural, also call for prompt action. The current trend towards more regulation on financial activities was illustrated with the European Commission making proposals at the March Council. Now the French president, current head of the G20, in a speech in Brussels on 14 June, argued that the "financialisation" of commodity markets and trades that are not backed up by real money could lead to a repeat of the recent economic crisis. He calls for developing and enforcing better regulations of trades in the commodities market, and the extension of the use of cash deposits to all derivative deals. The issue had been under scrutiny since last summer. The European Commission, by the voice of Commissioner Michel Barnier, backed Mr. Sarkozy's proposals of capping individual trade sizes. So did Farm Groups around the world, according to Associated Press.
Meanwhile, the European Parliament, reacting to the March European Council conclusions quoted above, has stated that "finance ministers have not done enough to improve economic governance." The EC has already formulated a compromise version of its 6 proposal package (21 June).
For the theoretical background, see "Regulation and Markets" by D. Struber (1989), and for updates in thinking, a conference will be organised in London on 6 July by City and Financial.

Regulatory principles under scrutiny

As previously reported on this blog, the OECD is actively seeking the views of officials from regulatory agencies and ministries, the private sector, social partners and civil society at large on the possible update of the 2005 Recommendation on Regulatory Policy and Governance (closing date 1 July).  Though unconnected with this consultation, an in-depth review of the current OECD principles has just been published by Frank Vibert, senior visiting fellow at the LSE under the title “Regulating in an age of austerity: reframing international regulatory principles.” Reading this paper is highly recommended in the context of the current revision.

Council wants to perfect Internal Market for Services

At its 10 March meeting, the European Coucil (Competitiveness) adopted interesting conclusions "on a better functioning Single Market for services – mutual evaluation process of the Services Directive." This endorsement of recent Commission work on monitoring of the implementation of the Services Directive invites the Member States to cooperate with each other and the Commission in order to move towards a more integrated Single Market for Services. The Council is acting on the assumption that the relaunch of the Single Market (and specially its services dimension) can increase competitiveness and create smart and sustainable growth and jobs. For background, see Commission site on Mutual Evaluation.