Expert: Rules mean security, cost
Published: Tuesday, April 1, 2008 at 6:01 a.m.
Last Modified: Monday, March 31, 2008 at 11:12 p.m.
More regulations like those proposed by the Bush administration Monday will mean more work and higher costs for professionals in insurance, mortgages and investment securities, according to a University of Florida finance professor.
Those costs would almost certainly be passed on to consumers, but it will also provide greater security for our money and possibly thwart the next financial crisis, said Jay Ritter, Cordell Professor of Finance in the Warrington College of Business Administration.
Ritter said too much regulation is always a risk, but weighing the benefits is difficult when you don't know the costs of inaction.
"Hopefully, the regulatory overhaul will reduce the probability of a major crisis developing at some point in the future," he said. "But 97-98 percent of the time, nothing is going to happen."
Ritter said there are advantages to proposals to reduce duplication among agencies and clarify who is in charge, likening the situation to multiple regulators in charge of various aspects of the New Orleans levee system before Hurricane Katrina.
"For many years, when no hurricanes hit, it wasn't a problem, but there is some point where it could matter a lot. Sometimes it takes a crisis to motivate changes that would have been better to do before there was a crisis."
Likewise, he said the current financial crisis has motivated long overdue financial regulatory reform.
"For many years there has been discussion in policy circles about doing a top-to-bottom overhaul," Ritter said.
He recalled talk about 10 years ago of revamping the Securities and Exchange Commission, comparing it to an aircraft carrier "in terms of the kind of thing you can't turn around on a moment's notice and that bogged down and never got done."
"Too much of the current structure is based upon the communications technology and the way the world operated 50 years ago," he said.
Although the details have yet to be worked out, he said one possible change would be better disclosure to consumers about the terms of their mortgages.
Further up the financial food chain, he said, investment banks that trade with commercial banks may become subject to the same kind of minimum-risk requirements affecting commercial banks because of the huge growth of trading in unregulated derivatives such as futures and options.
"This was an issue with Bear Stearns where Bear Stearns had transactions with regulated commercial banks, putting the commercial banks at risk," he said.
On the other hand, he said, the government does not always know better than those in financial institutions about how to solve their problems.
Anthony Clark can be reached at 352-374-5094 or firstname.lastname@example.org.
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