Financial Update (October-December 1998)
Regulators Respond to Market Developments, Guynn Says
arket developments in the financial services industry have changed the nature of financial regulation, according to Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta. In a recent speech to the Florida International Bankers Association in Miami, Guynn observed that "Markets move first, we react later." Nevertheless, he said, these same market developments make regulators' mission — preserving the safety and soundness of the American financial system — more vital than ever.
Regulators Must Keep Pace
"The central objective of post-Depression financial policy was — and, strictly speaking, still is — preventing competition between financial sectors," Guynn said. But technology and market developments "began undermining the financial regulatory structure more than two decades ago." Early evidence was the abandonment of fixed commissions on the New York Stock Exchange and later the repeal of interest restrictions on banks.
"It was a pattern that would be repeated over and over again, with the demise of interstate banking prohibitions, the end of interstate branching prohibitions and the expansion of Section 20 powers, to name just a few examples," he said.
Most of these developments took place in a comparatively low-tech environment, Guynn noted. "If two decades ago the market undermined four decades of financial policy that quickly, how much faster will it move when PCs are as ubiquitous as televisions?"
Are Regulators Relevant?
But it would be a mistake to conclude that regulators are no longer relevant, Guynn argued. "The sources of systemic risk today are basically the same as they were in 1933: transaction cascades, financial contagion and asset value implosion. But technology . . . has exponentially increased the speed and consequences of a financial system meltdown."
For regulators, the challenges are to redefine the term "safety and soundness" and to change the way regulation is conducted. "In today's financial services industry, regulations cannot keep up with innovations in the marketplace," he said.
To cope with this situation, supervisors are moving beyond anachronistic reference points like balance sheets to focus on the processes that bankers use to manage and deliver products and services.
"None of our initiatives have yet been perfected — far from it — but we think they are a good start toward forging the bank-supervisor partnership that is so critical for protecting the U.S. financial system," he said.
For the complete text of Guynn's speech, see The Changing Banking Landscape.