OECD governments are at a turning point. Central banks, treasuries and exchange authorities are not equipped with the needed regulatory tools to handle the current insolvency crisis. The monetary reaction operated by OECD central banks since the beginning of the crisis – easing access to short term government loans and/or reducing lead interest rates – were necessary to manage liquidity dry ups but insufficient to re-establish market confidence. The light regulatory approach that has prevailed in the past decade has nurtured a culture of excessive leveraging among financial institutions. This was favoured by lightly regulated entities such as hedge funds and private equity, but also by main street investment banking groups which are not subject to the same prudential rules than deposit banks. The toxic effect of leveraging was amplified by the financial “innovation” of the originate-and-distribute model of securitisation of debt: bad debt was traded under the guise of “structured products”.
The task of regulators has become impossible: not only do these “alternative” products and investment entities escape from their oversight, overseeing the activities of main street financial groups have also become a complication for them. Rather than increasing competition among institutions, the dis-intermediation of the financial system has given birth to global conglomerates that cumulate different lines of businesses which are subject to different regulations and hence different supervisory authorities.
Hat-tip: Oliver @ CWC