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Financial Regulation After the Crisis: Stay Vigilant On Reform, Says Architect of U.S. Legislation

Prague, May 21, 2013
Michael S. Barr delivers a lecture at the American Center in Prague on May 21, 2013. (photo U.S. Embassy Prague)

Michael S. Barr delivers a lecture at the American Center.

The financial sector is safer than four years ago but risk still persist. That is in short what Michael S. Barr, one of the key architects of regulatory reforms in the U.S., said in his speech in Prague.

Barr was keynote speaker at the event entitled Reform of the Financial Industry in the US and Europe after the Latest Financial Crisis. The lecture and panel discussion took place in the American Center Prague in cooperation with the CFA Society Czech Republic and with the support of Norman L. Eisen, U.S. Ambassador to the Czech Republic.

Michael S. Barr worked for the U. S. Treasury and advised the Clinton and Obama administrations. He became a main architect of the Dodd-Frank Act that significantly steps up the regulation of financial markets in the U.S. He is currently a professor at the University of Michigan Law School. Together with Barr, two other distinguished speakers took part in the discussion: Radek Urban, Deputy Secretary at the Czech Ministry of finance and Zdeněk Tůma, Director at KPMG and former Governor of the Czech National Bank.

“The crisis wasn’t an act of Nature. It was rooted in years of excess by financial firms, and complacency in Washington and in major financial capitals around the world,” Barr said, opening his speech.

The financial sector, under the guise of innovation, piled ill-considered risk upon risk. The innovation often outpaced the capacity of managers and regulators to understand it. Investment banks, insurers and other firms performed the same market functions as banks without being regulated as such. This was the reason for the passage of the Dodd-Frank Act in 2010. The act creates the authority to regulate systemically important Wall Street firms without regard to their form and aims to restrict risky activities. It also enacts a resolution authority to wind down major firms without putting taxpayers on the hook.

“These measures are likely to reduce risk in the financial system, reduce concentration, and reduce ‘too big to fail’ distortions,” Barr says. But much work remains to be done, both in the U.S. and internationally.

Regarding the Eurozone’s current situation, Barr thinks Europeans were too slow in taking the necessary steps to stem their financial crisis. The crisis in Cyprus showed yet again the weaknesses in Europe’s financial decision-making. The EU needs to put in place its proposed European-wide bank regulator as well as resolution and “bail in” frameworks.

“But we need to have deep humility about the ability to predict financial crises or the systemic failure of a major financial firm,” he adds. There remains the danger that the next financial crisis, like the last, will occur when there are still no globally coordinated mechanisms for regulation or crisis management. Consumers, investors and taxpayers are better protected—by a lot.  But that is not enough, Barr points out.

In the subsequent panel discussion, Zdeněk Tůma mentioned the impact of regulation of firms. “Many regulatory changes are discussed at the global level, be it in the Financial Stability Board or the Basel Committee. However, many measures were taken at the national level but they have international impacts. For multinational financial institutions, it may be challenging to comply with various measures in all jurisdictions,” Tůma said.

And how should the Czech Republic react to regulatory reform? “We need no ‘gold-plating’ above and beyond the measures already approved in the EU,” Deputy Minister Radek Urban said. “Czech banks are already in compliance with the CRD IV directive not only with regard to capital requirements but also in liquidity and funding. And there are parts of the directive that are too stringent, for example bonus caps; we think this is a matter for shareholders, not regulators,” he added.