Paul Volcker: The market has flopped and we’re all running back to mother

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Former Fed Chairman Paul Volcker, former Fed Vice Chairman Roger Ferguson and former Bank of Israel Governor (and AIG vice chairman!) Jacob Frenkel had a little press conference this morning to discuss the structure of financial regulation or–more precisely, a report called The Structure of Financial Regulation (pdf; and it’s just the press release, not the report proper, which doesn’t appear to be available online yet–update: the report can be found here).

It’s a product of Group of Thirty, a now 30-year-old club of former (and a few current) central bankers that occasionally issues reports like this. The report itself is timely, but not particularly newsworthy: It describes the financial regulatory structures in 17 different countries, and concludes that “the Integrated Model and the Twin Peaks Model may more rationally reflect the changes that have taken place in the financial business.” The Integrated Model is where one regulator, like the Financial Services Authority in the UK, watches over everything. Twin Peaks is of course where FBI Special Agent Dale Cooper investigates the death of homecoming queen Laura … No, sorry. Twin Peaks is where you have one regulator looking after the safety and soundness of financial institutions and another looking out out for the interests of consumers–which happens to be how they do it in Australia and the Netherlands.

The U.S. follows the Lots and Lots of Different Regulators at Different Levels of Government With Often Conflicting Priorities Model, which the Group of Thirty euphemistically labels The Exception.


Anyway, that’s not news. But there were interesting insights to be gleaned from the comments of Volcker, Ferguson and Frenkel.

Most of them came from Volcker, and sometimes they didn’t require words. When Frenkel declared that a key lesson from recent events was that “bank supervision should rest within the central bank,” Volcker raised his eyebrows high and opened his eyes wide. He didn’t quite roll his eyes, but he made pretty clear that he wasn’t signing on with Frenkel’s statement. “The answer to that is no,” Volcker said when somebody asked him point blank later if he endorsed what Frenkel said. “We take no position on that in this report.”

Volcker also kept making comments that somewhat undercut the conclusions of the report. The report recommended, for example, that there should be much more international communication and cooperation. The two financial regulatory realms in which there has been the most international communication and cooperation up to now have been accounting standards and bank capital requirements. “It’s interesting that both the capital standards and accounting standards are subject to some question,” Volcker said.

Then there’s the supposed strength of the Integrated Model: “The United Kingdom, which had the most unified bank regulatory system, seemed to have trouble coordinating between the central bank and Treasury and the FSA,” Volcker said. “It seemed to me that in the U.S. the communication between Treasury and the central bank has been more fulsome than in the UK.”

Finally, both Volcker and Ferguson seemed to be looking more to the past for reassurance than envisioning some grand new regulatory structure. Ferguson said repeatedly that one of the key lessons from the Group of Thirty’s research was that “having a modern, robust deposit insurance scheme is critical in these times.” The U.S. has of course had deposit insurance since the 1930s, although it was tweaked (modernized and robustified, if you will) a bit in 1991.

And Volcker said that we’ve just been through a period in which competitiveness was repeatedly used as an excuse (in New York, London and elsewhere) to exempt new players and new products from regulation, thus driving financial activity away from the (heavily regulated) commercial banks. “What’s interesting now is everybody’s running back to mother, mother being commercial banks,” he said. “The market took over, and I think it’s fair to say the market has flopped, and we’re going to have to reconsider supervision … apparently with commercial banks still at the core.”

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