THE BUMBLING COLOSSUS  By Henry F. Field                                              
The Regulatory State vs. the Citizen; How Good Intentions Fail and the Example of Health Care;
                                  A New Progressive's Guide    
  (available at
The Harms of Financial Over-Regulation
The reaction to the financial crisis of 2007-8 was to enact the Dodd-Frank Act, on the premise that where regulation had failed, the cure must be ever more regulation. It asks agencies to enact 243 rulemakings and engage in 67 studies to enable more. The Act is 848 pages of impenetrable delegation, over ten times the length of New Deal banking acts.

The principal issue is, does all that get us anything? Are we and the banking industry safer for all that? Let's see what England's top regulator has to say about his country's and the U.S. regulatory efforts. But let's start with what "The Bumbling Colossus" has to say:

     On page 43 at footnote 18 of The Bumbling Colossus, the author states that "The Dodd-Frank Act totally missed the cause of the financial crisis and compounded woes by heaping unneeded regulatory burdens on an already overregulated financial sector." This view is repeated, TBC at 59.

Now from the regulator's perspective -- the inside, so to speak -- we hear the same thing.

On August 31, 2012, England's top regulator, Andrew Haldane, Exec Director, Financial Stability, Bank of England, and Vasileios Madouros, economist, Bank of England, published a paper (given as a speech by Haldane at the Federal Reserve Bank of Kansas City's symposium) entitled "The Dog and the Frisbee". Their views (from the inside) dramatically underscore the points made in "The Bumbling Colossus".

This paper is worth reading in entirety, publications/Documents/speeches/2012/ speech596.pdf.  But here are a few nuggets:

On Rule Prolixity and Burdens:    "As of July this year, two years after the enactment of Dodd-Frank, a third of the required rules had been finalised.  Those completed have added a further 8,843 pages to the rulebook.  At this rate, once completed Dodd-Frank could comprise 30,000 pages of rulemaking.  That is roughly a thousand times larger than its  closest legislative cousin, Glass-Steagall.  Dodd-Frank makes Glass-Steagall look like throat-clearing."

"The density and complexity of financial regulation has had predictable consequences for the scale and scope of regulatory resources.  One metric for that would be the number of human resources devoted to financial regulation.  ...  The FDIC and SEC
were set up as part of the regulatory response to the Great Depression.  In 1935, together with the OCC and supervisors housed in the Federal Reserve banks, they had combined regulatory resources of around 4,500 people.  There was one regulator for every three banks in the US (Chart 2).  Today, the combined regulatory resources of the FDIC, OCC, Federal Reserve banks and SEC is closer to 18,500 people.  That is three regulators for every US bank"

"As numbers of regulators have risen, so too have regulatory reporting requirements. .... The Federal Reserve Act of 1913 required all state-chartered member banks to file reports with the OCC and in 1917 responsibility for collecting these passed to the Federal Reserve.  By 1930, these reports might contain around 80 entries. Today, regulatory reporting is on an altogether different scale.  Since 1978, the Federal Reserve has required quarterly reporting by bank holding companies.  In 1986, this covered 547 columns in Excel, by1999, 1,208 columns.  By 2011, it had reached 2,271 columns.  Fortunately, over this period the column capacity of Excel had expanded sufficiently to capture the increase. "

And this is Just the Beginning:    "Dodd-Frank rulemaking in the 12 months after its enactment covered thirty new rules or less than 10% of the total.  A survey of the Federal Register showed that complying with these new rules would require an estimated 2,260,631 labour hours every year, equivalent to over 1,000 full-time jobs. Scaling this up, the compliance costs of Dodd-Frank will run to tens of thousands of full-time positions."

"Of course, the costs of this regulatory edifice would be considered small if they delivered even modest improvements to regulators’ ability to avert future financial crises.  The public policy question is – will they?  In financial regulation, is more more or is more less?"

The Costs of Regulation Outweigh the Benefits:   Haldane & Madouros' answer to whether the rules will improve things, building upon numerous complex statistical analyses, is "no", this regulatory explosion will NOT reduce risks, but rather will increase them.  

"In forgone output, financial crises can be as costly as wars.  The public policy issue, then, is whether the war on crises is best waged with the weapons of the past.  Einstein wrote that: “The problems that exist in the world today cannot be solved by the level of thinking that created them”.  Yet the regulatory response to the crisis has largely been based on the level of thinking that created it."

"The Tower of Basel is underpinned by three pillars:  Pillar 1 (regulatory rules); Pillar 2 (supervisory discretion); and Pillar 3 (market discipline).  To date, the weight borne by these three pillars has been heavily unbalanced, with most of the strain taken by Pillar 1.  Simplifying Pillar 1 rules would help rebalance the Basel scales.  That would not only strengthen Pillar 1, but could simultaneously strengthen Pillars 2 and 3. A rebalancing away from prescriptive rules provides greater scope for supervisory judgement, Pillar 2."  

The Comparison with Medicine and Health Care:   "In other professions, such as medicine, prescriptive rules have generated a wood-from-trees problem.  They have also caused defensive, backside-covering behaviour.  Both may have increased risk in the system. What is true of doctors is almost certainly true of bank supervisors.  In the pre-crisis period, being required to monitor many small, rule-based risks may have caused supervisors to overlook potentially life-threatening ones.  This ticked-box approach failed to save the banks, just as in medicine it fails to save lives. Supervision suffered the same fate as the autistic savant – penny-wise but pound-foolish. Breaking free of that psychological state calls for a fresh approach, one which is less rules-focussed, more judgement-based. "

Dependency and Loss of Initiative:   On page 49 of The Bumbling Colossus, note is made of the tendency over-detailed regulation has to create dependency and lapse in independent judgment. The Haldane report points out that the same thing is true of financial regulators as it is of doctors:

"There is a final, related but distinct, rationale for simple over complex rules.  Complex rules may cause people to manage to the rules, for fear of falling foul of them.  They may induce people to act defensively, focussing on the small print at the expense of the bigger picture. Studies of the behaviour of doctors illustrate this pattern (Gigerenzer and Kurzenhäuser (2005)). Fearing misdiagnosis, perhaps litigation, doctors are prone to tick the boxes.  That may mean over-diagnosing drugs or over-submitting patients to hospital.  Both are defensive actions, reducing risks to the doctor.  But both are a potential health hazard to the patient.  For example, submitting patients to hospital increases significantly their risk of secondary infection.  Hospitals are, after all, full of sick people. Doctors unencumbered by a complex rulebook will have fewer incentives to act defensively.  They may also be better able to form their own independent judgements
when diagnosing medical problems, using their accumulated experience.  That ought to more closely align a doctor’s risk incentives with their patient’s.  The same is likely to be true of other professions, from lawyers to policemen to bank supervisors."

For the entirety, go to: publications/Documents/speeches/ 2012/speech596.pdf

"The Bumbling Colossus" is available at
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