Dreaming of Regulatory Cooperation

Roger Ehrenberg has a sensible call for, among other things, "common regulatory frameworks": regulators around the world should all be singing from the same songbook, he says, in order to minimize regulatory arbitrage as well as reduce the "immense friction [involved in] operating regulated businesses across markets due to different rules and standards".

As an adjunct to that, I'd urge greater regulatory cooperation. I don't mean more meetings where central bankers get together in Basel every couple of months; there are too many of those already. I mean more frequent and less formal connections, where regulators share information with people who need it.

The example I have in mind is SocGen. The French central bank knew exactly what was going on, but it didn't tell the French government, and it didn't tell the Federal Reserve, and I don't think it even told the European central bank.

Now when a regulator is in possession of incredibly valuable market-moving information (like "SocGen has to unwind €50 billion in long equity-forward positions, sharpish"), then it makes a certain amount of sense to tell as few people as possible: a secret simply stops being a secret once it's known by more than a handful of individuals. On the other hand, there must have been something that the French regulators could and should have said in order to at least let the Fed and others know that it was in the middle of putting out a fire, and that short-term market weirdnesses might result.

But of course it's the French we're talking about here. Share regulatory information? They'd probably rather eat steak-and-kidney pie.