In 2011, the government’s Financial Crisis Inquiry Commission issued an exhaustive report on the roots of the 2008 crash. It concluded that lax regulation and the inadequate enforcement of existing regulations lay at the heart of the meltdown.
More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. …
Changes in the regulatory system occurred in many instances as financial markets evolved. But as the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products. It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators… What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.
Now, three years later, Joe Morris reports in The Financial Times that the regulatory agencies keeping an eye on Wall Street are being woefully underfunded given the complexity of today’s financial instruments.
Even with new budget increases, US securities regulators are falling further behind the market when it comes to technology investment, and the investment advisers and swaps dealers they oversee are likely to remain largely uninspected.
The first comprehensive federal spending plan since 2009, hammered out in Congress last week, raises the Securities and Exchange Commission funding by $29m, to $1.35 billion, or $324 million below the White House’s request. The Commodity Futures Trading Commission (CFTC) budget rises about $10m, to $215 million, or $100 million less than requested.
The additional funding sought by the administration for the SEC was intended to pay in part for the hiring of 250 examiners dedicated to registered investment advisers, whom the regulator now examines only once every 11 years on average.
“Whatever increase in the examination of advisers they are able to perform will have to be gained through efficiencies, and while I am certain that examiners’ productivity can be increased, I don’t think we can expect to see a significant change in the overall examination rate,” says Neil Simon, vice-president for government relations at the Investment Adviser Association…
Dennis Kelleher, president of Better Markets, the financial reform advocacy group, contends the technology allocations suggest the SEC and CFTC are “funded at a level to fail.”
“What both agencies are trying to do is get a better understanding of high-speed computer trading and how it is affecting markets, and yet they are not getting anywhere near the ability to do that,” Mr Kelleher says. “When you cut the reserve fund at the SEC by 50 per cent, and on top of that you underfund them overall, you really are putting them in an impossible position.”
Read the whole story at The Financial Times » (registration required)