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America must start again on financial regulation, Henry Kaufman, Financial Times, December 17, 2010.
The US has one of the most decentralised financial regulatory structures in the world. This has not changed materially with the post-crisis reforms voted by the US Congress in July 2010. US regulatory jurisdiction follows a complex, and seemingly ad hoc , combination of market and institution criteria. Some bodies regulate a certain type of institution, while others regulate a specific market or product (Pellerin et al , 2009). Proponents of this system argue that it makes regulators efficient because it gives financial institutions some opportunity to 'shop' for the best regulatory jurisdiction. Detractors see this same mechanism as a problem because it creates incentives for financial institutions to structure and locate transactions in the most lightly regulated jurisdiction.
Adding to this complexity was a series of steps in the late 1990s that loosened regulation in ways that arguably contributed to the building vulnerability of the US, and global, financial systems. The financial regulation reform legislation the US Congress voted in 2010 keeps the decentralised structure intact and leaves important decisions to be made during the implementation process. The relatively limited scope of reform, given the magnitude of the financial crisis and the political momentum afforded by the US presidential election, suggests that a status quo bias is alive and well in the US, operating through the traditional and modern politics of lobbying and through the close association between regulators and those being regulated.
PRE-CRISIS US FINANCIAL REGULATIONS
The decentralised and overlapping nature of the US financial regulatory system is very evident in the arena of securities regulation. Both the Securities and Exchange Commission (SEC), created in 1934, and the Commodity Futures Trading Commission (CFTC), created in 1974, could claim authority to regulate securities derivatives. In the late 1990s, financial industry representatives lobbied heavily to prevent consolidation and a tightening of derivatives trading under the CFTC. As a result of political manoeuvring, government oversight of derivatives trading remained relatively limited and the experiment in self-regulation, begun with the Derivatives Policy Group in the mid-1990s, faded away (Maxfield, 2010).
The repeal of Glass-Steagall legislation (1933) - legislation that had kept US banks relatively small, specialised and lagging behind their international counterparts,...