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Posted by Rod Nelsestuen, TowerGroup

“The game’s afoot.” Whether you admire Sherlock Holmes or King Henry V for that saying, the release of the US Administration’s 80 page document outlining regulatory reform has brought everyone with an opinion into the debate. While the 5 objectives put forth are well-intended, they should be further separated into more specific and distinct areas to better delineate the role of government in the safety and soundness of the financial system.

Each of the 5 objectives has the potential to be as challenging as were the 12 labors of Hercules in Greek Mythology. A major part of their difficulty is that each statement poses a duality that must be eliminated if the intended results are to be achieved. Let’s take a look at these objectives:

1. “Promote robust supervision and regulation of financial firms.”

2. “Establish comprehensive supervision and regulation of financial markets.”

The terms “supervision and regulation” should be used in separate statements. While regulatory reforms are needed, regulation alone has little chance of stopping the next crisis. But close and continuous supervision can help avert crisis. Regulation can only say what may and may not be done. Supervision observes business in real time and has the opportunity to intervene before a crisis goes beyond repair. Supervision focuses on performance as Brian Barnier touched on in his blog. In combining supervision with regulation, the administration might take a lesson from Fred Winegust’s post on losing weight since they risk becoming bloated and ineffective.

3. “Protect consumers and investors from financial abuse.”

While consumers are often investors, they also have different interests that need separate protections. While we all want to be protected from unscrupulous lending practices, we don’t want the government to require the companies we invest in to hold excess capital which reduces ROE and suppresses stock price.

4. “Improve tools for managing financial crisis.”

Government power is only as good as the government’s ability to gather the real time data and information needed to be effective during times of crisis. The “tools” need expansion to include the technological capability to gather and assimilate huge amounts of data quickly because the effectiveness of action is inversely proportionate to the latency of information flows.

5. “Raise international standards and improve international cooperation.”

International cooperation is fundamental to working toward a sustainable financial system. And cooperation is often easiest to achieve in times of crisis, or to avert crisis. Standards, however, demand bureaucracy, documentation, and negotiation. If the Administration is bogged down trying to agree on international standards, they will quickly lose sight of the more important goal of cooperation. In short, while both standards and cooperation are necessary, they are also different and must be treated that way.

Yes, the game’s afoot in regulatory reform. The Administration’s goals are on the right track. But the way they’ve outlined these 5 objectives, we might discover we’re living a myth.