Regulation and the Resilience of the World Economy

By Anjana Bhatiya

At the recently concluded (January 20, 2016) World Economic Forum meet, policy makers, executives, and experts discussed ideas and solutions facing major challenges concerning the financial system. It is a well-documented fact that the major challenge faced by most governments around the world is to create a resilient financial system. There is little doubt that the global financial crisis not only impacted the financial system but also the confidence of investors around the world.

Regulators around the world have called for increasing regulation. Whilst regulation plays an important role the question that governments must answer is how extensive must the regulation be? Is over regulation the answer to the systemic challenges faced by financial systems around the world? One argument is that overregulation creates complexity and is costly. This is because complexity costs money. Sarbanes-Oxley is a case in point. It is so complex that many firms aren’t choosing to list or if they do they choose to list elsewhere rather that in the U.S. If the rules are simple regulators can enforce them. This begs the question – why do we see an expanded regulatory environment? Research has shown that the three large U.S. based rating agencies played a central role in the subprime mortgage debacle and the financial crisis of 2008. This clearly led to the political calls for more regulation. Whilst less or no regulation is dangerous excessive regulation is also dangerous as it will not only raise the barriers to entry but will also curtail innovation. Policy makers have to ensure that regulation is made simple but through a sensible approach.

Governments around the world must engage in and address major challenges concerning regulation, financial inclusion and the role of technology in the way financial services are being delivered to market participants. It is evident that the 2008 Global Financial Crisis has exposed major weaknesses in the financial system and the challenges faced by interconnected markets. Most economies are still recovering from the crisis and against this backdrop it is expected of governments and market regulators to make the markets more resilient to be able to withstand future markets shocks and prevent corporate scandals.

In sum, countries need regulation but a smarter and a sensible approach to regulation, and regulation must come with sunset clauses. In essence, rules need to be simpler.