How can we benchmark regulators?

Given the inherent risks of downward spirals in regulatory competence - not least the way financial sector firms can "rent" politicalinfluence -  how can we design the system to prevent the race to the bottom and regulatory arbitrage?

Clearly, we need somecreative thinking here, not least because those who are being evaluated are unlikely to welcome the ranking!

So here's one idea to get the ball rolling: the World Economic Forum could commission a credible (ie multinational, multi-disciplinary) academic team to do an annual study looking at what's improved and what's got worse that year, and present this study at Davos with a panel of the world's most credible commentators adding some qualitative insights.  An exercise in intellectual jaw-boning if you will.

One of the experts would certainly be George Soros who has already started on this project in an informal manner.[1] Speaking at an event held by The Economist magazine this week, said he held Bank of England governor Mervyn King and UK Financial Services Authority chairman Lord Turner in high regard and that "The UK has the best thinking on financial regulation and that is the best hope for London to retain its position as the world's number one financial centre."

Worryingly he added that regulators "were not close" to fixing the problem of having banks that are too big to fail but that the debate in the UK was "vastly superior" to that in the US - "What do US senators know about markets?"

Soros also called for the biggest US banks to be broken up: ""I'm in favour of the Volcker rule [which would ban deposit-taking banks from doing prop trading]. The biggest four banks control three-quarters of banking business in the US," he said.

In an even more explicit statement, another successful hedge fund manager - who made his name betting on the collapse of Enron - has urged regulators to investigate the proprietary trading records of large banks during in 2008.

James Chanos, founder and president of hedge fund Kynikos Associates argues that they, and not hedge funds, were the biggest contributors to falling share prices on Wall Street during the worst of the crisis.[2]

“I think there ought to be a lot of criminal indictments in what we saw, because the nub of the crime was taking aggressive marks on illiquid derivatives and hard-to-value securities, calling it profit, and paying yourself 50 cents on the dollar as a bonus. You were stealing from your shareholders.”

Given the political influence of banks [3], this sort of effective regulatory action looks some way away.  So hence the "track two" suggestion above to try to fill the gap.  Hello Davos ....are you listening?

[1]   http://www.efinancialnews.com/story/2010-04-14/soros-backs-uk-regulation?ref=email_30338
[2]   http://www.efinancialnews.com/story/2010-04-14/chanos-banks-prop-trading...
[3]   http://13bankers.com/