Structures won't save us

I went along to the Treasury select committee hearing today on financial regulation. It's the first time I've been to one for some time and I thought I'd go a) because the topic is interesting b) I was interested to see how the new committee is working (some new MPs on there) and c) because Paul Myners is always good value.

The Guardian has already run a piece on the session here which focuses on one aspect, but for me the most interesting thing was the clear consensus between Myners and Professor Goodhart (who was also giving evidence) that the new regime, with the Bank getting more responsibility, would make little difference in terms of preventing future crises. Perhaps I'm being unfair, after all Goodhart said that the new regime would make a future crisis 'marginally less likely'. But the overall message I got was a very simple one - it doesn't matter what offices people sit in, or what committees they are members of. Rather the real need is to focus on behaviour and competence.

Both Myners and Goodhart were not convinced that the new structures would make much difference, and even suggested that there might be new problems, as the Guardian piece point out, and the committee members didn't challenge this view either. Someone (don't remember who) said that basically a suboptimal structure operated well can do a better job than an optimal structure operated badly.

This is, of course, very similar to the argument that companies put forward (with some justification) about governance issues - good structures and policies don't make good managers. I would make the further point that it also applies to ownership structures. Private equity - in theory - provides a better model because the agent-principal relationship is much closer. But as Guy Hands has demonstrated at EMI once again structure can't eliminate poor decisions (and it really is amazing to see someone like him reduced to arguing that he was tricked into buying a lemon!).

One final point of interest was the argument around responsibility. Conservative committee member Andrea Leadsom said that when she was lobbied by banks they often sought to blame regulators. She wondered whether the focus on regulatory responses, rather allowing competition to rip, made banks more likely to think like this. Myners made the point that ultimately whatever failing there were on the part of the FSA, Bank and Treasury, it was primarily the responsibility of the boards of those banks - and their shareholders - to ensure that the institution was run in a way that was sustainable. I am obviously on the same page. But interestingly, Goodhart made the comment that actually one of the problems during the crisis was an unwillingness to say that on occasion regulators do know better than banks.

I personally think banks blaming the regulators is largely a buck-passing exercise, but it did remind me that Bruno Frey, in his excellent little book on motivation, argues that regulation can 'crowd out' a propensity to behave well. So maybe there is something worth thinking about there. And I am intrigued by the proposition that regulators may be in a better place to judge sometimes. If this is true, doesn't it raise a question about why bankers are more highly remunerated than those that monitor them?