Speaking at the annual central bankers conference at Jackson Hole, Wyoming, one of the top directors of the Bank of England called for a return to the Glass-Steagall principle of reforming the banking system. The speech was written by Andrew G. Haldane, Executive Director, Financial Stability and member of the Financial Policy Committee, and Vasileios Madouros, Bank of England economist, and delivered by Haldane, well known as an admirer of Glass-Steagall.
His speech, "The Dog and the Frisbee," was unambiguous about the virtues of Glass-Steagall. As the title implies, the speech calls for keeping the regulation of banks as simple as the ability for a dog to catch a Frisbee without knowing any laws of physics. The bulk of the 36-page speech, including graphs is a experimental demonstration, that complex regulatory systems like the Basel agreements, the Dodd-Frank Act, or the Vickers recommendations, are doomed to failure.
After referring to the super-complex Basel accords as a "Tower of Basel" that started at 30 pages and will ultimately run to 60,000 when Basel III is finalized, Haldane said:
"Viewed over an historical sweep, this pattern is even more striking. Contrast the legislative responses in the U.S. to the two largest financial crises of the past century — the Great Depression and the Great Recession. The single most important legislative response to the Great Depression was the Glass-Steagall Act of 1933. Indeed, this may have been the single most influential piece of financial legislation of the 20th century. Yet it ran to a mere 37 pages."
He compares Glass-Steagall to the Dodd-Frank Act of 2010 at 848 pages — "more than 20 Glass-Steagalls," and could comprise 30,000 pages when completed "That is roughly a thousand times larger than its closest legislative cousin, Glass-Steagall." The "Tower of Basel" Europe regulatory reforms that ultimately promise to run to 60,000 pages "would make Dodd-Frank look like a warm-up act."
He then attacks the last 30 years' practice of "pricing risk in the financial system, rather than prohibiting or restricting it," but under current conditions of "an uncertain world. Quantity-based restrictions may be more robust to mis-calibration. Simple, quantity-based restrictions are the equivalent of a regulatory commandment: 'Thou shalt not.' These are likely to be less fallible than: 'Thou shalt,' provided the internal model is correct." That is one reason why Glass-Steagall lasted for 60 years longer than Basel II.
He concludes: "Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity. Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today's regulators to save us from tomorrow's crisis using yesterday's toolbox is to ask a border collie to catch a Frisbee by first applying Newton's Law of Gravity."
The speech bears the disclaimer that "the views are not necessarily those of the BOE or the FPC," but then again they are not necessarily not the views of the BOE.