Hope for Principles-Based Regulation in New York State

New York governor Eliot Spitzer and his insurance superintendent Eric Dinallo are aggressively moving to shake up the regulatory regime in New York State. This is probably a good thing.

A new panel chaired by Dinallo will include the chief executives of Goldman Sachs, Citigroup, AIG and MetLife, and the heads of several New York-chartered banks and representatives of consumer and New York business groups. It will also include the four state agencies overseeing the industry. It will look at New York's regulatory regime, and ask whether it makes sense to move to a principles-based approach.

There are no easy answers here. Spitzer, remember, is still notorious on Wall Street for disinterring the ancient Martin Act and using it to prosecute all manner of transgressions which were more properly under the purview of the SEC or other regulators. So the New York attorney general is likely to always have a lot of power under any regime, and Wall Street is going to want a lot of comfort that a capricious attorney general won't use a principles-based approach to come down hard on banks for political reasons. After all, the AG is elected, unlike say the Financial Services Authority in the UK.

What's more, even if New York does move to a principles-based approach, that really wouldn't reduce the number of rules its banks operate under, since they will still have rules-based federal regulation. The hope, of course, is that the Feds too will move to a principles-based approach. But I'm not holding my breath.