Photo: Ben Thai. Source: Pixabay
In banking, there are four or five ways to measure capital and over a dozen ways to classify assets. In insurance there’s a complex web of reserve calculations and investment silos. And everyone in finance is subject to an alphabet soup of regulators: the SEC, FDIC, OCC, FINRA, FinCen, CFPB, NAIC, NFA, CFTC, and the list goes on. Will we improve our financial system by adding another layer of calculation and regulation?
Having regulators compete with each other can be good on one level. It encourages each agency to do its best. But it can lead to regulatory capture, where an SEC lawyer might just be punching a ticket before changing jobs to become the compliance chief of a billion-dollar hedge fund. How likely is that SEC lawyer to come down hard on the hedge fund? How often does the junior cop just give a warning to the mayor’s kids?
Thoreau writes, “Simplify, simplify. Our life is frittered away by detail.” A rational regulatory regime with clear simple rules, like simple ratios, might not be perfect, but it would be clear. If the assets are controlled by you, they belong to you, and also belong on your balance sheet. A simple, uniform corporate tax rate brought in more revenue in Ireland per corporation than does a higher rate with more exemptions in Italy. That’s the idea behind tax reform here.
In finance, there’s a lot of room to simplify. But it’s hard to get the balance right. If you get too simple, you miss the nuances. Newtonian physics is simpler than relativity, but it doesn’t work in many situations. As Einstein said, “Everything should be made as simple as possible, but no simpler.”
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”