Views on improving the integrity of global capital markets
23 May 2013

Volcker vs. Vickers (Part 2): Where Do Financial Reform Efforts Stand?

Between British economist Sir John Vickers — who in 2010 became chair of the U.K.’s newly created Independent Commission on Banking — and former Federal Reserve Chair Paul Volcker, there few people as synonymous with efforts to prevent another systemic meltdown as these two policy luminaries.

As we approach the five-year mark since the global financial crisis’ peak in 2008, we’re examining key issues through the lenses of Volcker and Vickers, who at a recent event in New York discussed the lingering fallout of the financial crisis and still-nascent reform efforts. Whereas Part One of “Volcker vs. Vickers” outlined key differences in how Volcker and Vickers view systemic-risk-based regulations, this post takes a closer look at their views on the current state of progress in fixing gaps in regulation and taking adequate steps to prevent another major financial crisis. It is the second in a month-long series exploring key systemic risk issues from the perspective of Volcker and Vickers.

As the days and months pass since the financial crisis, the intensity and alacrity surrounding reform efforts have ebbed and flowed. As noted previously, many are now disappointed that the sense of urgency and calls for global cooperation marking early reform efforts have given way to the long grind of legislative policy making, further hindered by powerful and well-financed commercial interests intent on blocking new regulations that alter the status quo. In that vein, neither Volcker nor Vickers is particularly satisfied.

At the recent event, John Vickers commented that the magnitude of the blowup that occurred in the U.S. and in major European markets should not be underestimated. People forget with time just how dire the circumstances were and just how close we were to the financial precipice. What should have occurred as a result of this near financial apocalypse was a serious and sustained reform response. We always expected that it would take time, and more specifically, be a multi-year effort that included hard looks at both the regulation and structures of institutions. While certain reforms have been put in place, the pace of rule development and implementation has been a serious disappointment to anyone hopeful of preventing another major crisis. There are many critical pieces of reform that are yet unfinished, including globally consistent derivatives and swaps regulation. And lest we forget the still-looming issue of “Too Big to Fail” banks.   

Likewise, Paul Volcker is frustrated with the lack of progress and the challenge of advancing needed reforms as we distance ourselves from the “heat of the crisis.” He noted that we are dealing with a cultural “reality” within finance in the U.S. and even globally. He sees it as a problem within financial institutions and even among financial regulators that takes time and patience to change. We can only agree with concerns we see with the “tone at the top” of financial services firms and how it remains an impediment to reform efforts. It often seems like the financial services industry has a complete lack of accountability for what happened in the crisis, remaining steadfast in its “business as usual” practices. Volcker stressed the irony that a constant industry drumbeat here in the U.S. that the reforms enshrined in the Dodd-Frank Act are too complex, anti-business, and go against our own competitive interests is coming from the same players responsible for the vast destruction of wealth and economic value during the crisis. Put as simply as possible, reform needs honest and persistent attention, and we are not getting it. 

As an example, Volcker noted that nearly everyone in the regulatory regime in the United States sees Money Market Mutual Funds for the systemic risks they pose. Despite this obvious and gargantuan problem, nothing is done to resolve the problem. Meanwhile, the global cooperation around a single set of high-quality global financial reporting standards likewise has fallen flat. Last but not least, compensation practices in finance remain another significant unresolved issue.  

For both Volcker and Vickers, the list of reform disappointments is a long one.

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About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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