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

Former Fed Chair Volcker Takes on Most Daunting Challenge Yet: Reshaping Financial Regulation

Volcker and leadership.

Two words have seldom been more comfortably linked. In accepting only the second-ever award for leadership excellence bestowed by the Economic Club of New York, former Fed Chair Paul A. Volcker was both cleverly nostalgic and inspiring at yesterday’s ceremony. Of particular note in his remarks to the noon-time crowd was his great joy for fishing and great skepticism over the unorthodox mechanisms and activities of today’s Federal Reserve in comparison to times past. Fully recognizing that markets are different and more complex these days, Volcker noted it should not give the Fed free reign to stray from the basic tenants and parameters of acceptable Fed action. The boundaries have been stretched enormously in his view.

Volcker then wasted no time in getting to the problem he considers the crux of the crisis of 2008, why the Federal Reserve now seems ensnared in extraordinary measures, and why policy makers are still grappling with fixing regulatory gaps. Simply stated, we need a new-age regulatory system to deal with new-age markets. In that spirit, he has unveiled a new initiative called the “Volcker Alliance.” Both funding and advisory talent for this effort are lining up (so far, some of the same industry and regulatory experts we’ve been fortunate to have serve on our own Systemic Risk Council, for which Volcker is a senior adviser). In a system now consumed by gridlock and ensnared by industry interests, the work to shed light and develop ideas for a new approach to financial industry regulation is compelling.

Mr. Volcker purposefully decided to stay away from affiliation with a university program or applied school of any sort in an effort to keep the effort focused, practical, and timely, in his words. Time is of the essence in these matters, and we must not become mired in theory when so much is at stake. The focus that Volcker outlined is, in many ways, comparable to a regulatory big bang theory, i.e. blow up the six existing financial regulators and start fresh. He recognizes the vast array of vested interests but feels the current dysfunction can no longer go unchallenged. Ideally, a new, appropriately funded, and well-coordinated three-agency approach to financial industry oversight would be the starting framework.

Obviously, the Alliance needs time to do its thing and sort through the complexity and practicality of such an enormous undertaking, but time is short in his estimation. Volcker hinted that he may be an old fuddy-duddy, but even he recognizes that the ways and means of regulating an industry 40-50 years ago have now failed us. Consistent with other commentary in this space, our regulatory scheme can no longer match the level of market technology and sophistication, and we urgently need a considered and considerable remodeling.

Quite an interesting vision for anyone, much less an 85-year-old trout fisherman. The future of finance will be only as good as the future of financial regulation, and we congratulate Mr. Volcker on his decades of leadership and this award. We wish him and the Alliance well in their creative and ambitious mission.

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

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees 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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