- The Washington Times - Friday, February 21, 2003

WASHINGTON, Feb. 21 (UPI) — Corporate malfeasances and shaken confidence in financial markets over the past two years have increased the call for sweeping reform in the U.S. financial services sector. But some economists said Friday that restructuring the system won't necessarily improve transparency nor protect consumers any more than under the current system.

The United States has a "crazy pavement" of various financial institutions, said Richard Dale of Southampton University at a conference on financial regulation. Indeed, U.S. banks as well as savings and loans groups are regulated both at the state and the federal level by four agencies. Meanwhile, insurance companies are regulated by each of the 50 states under separate rules. As for securities companies, they are all regulated under the federal Securities and Exchange Commission, but they are also facing more regulation at the state level.

At the same time, most industrialized countries, including Britain and Japan, are moving toward consolidating all financial regulatory functions into a single agency, which regulates the banking, insurance and securities industries. Those who call for the United States to have a more uniform approach to financial regulation argue that companies that are competing with one another should be regulated in the same way across the board, regardless of where they are located.

Furthermore, those pressing for further uniform control point out that with product convergence, whereby banks, insurance companies and brokerage houses offer products that compete across industrial boundaries, there will be more need for more harmony in financial regulation. Certainly, financial scandals in the recent past have given those who are pressing for more regulation greater ammunition for their cause.

Yet Federal Reserve Board Gov. Mark Olson made clear earlier this month that the overhaul of federal banking laws in 1999 was not the cause of the corporate scandals over the past two years.

"The abuses recently brought to light are the result of corporate governance issues, such as lax internal controls, that had not kept pace with the changing financial markets," Olson said. He added that the problems were "largely the result of corporate governance and internal control weaknesses in individual business lines."

That may or may not be. But economists cautioned that simply increasing regulation and red tape won't immediately lead to better financial transparency and supervision.

"The United States still has a very good financial system … not because of the set-up, but because of the people" and their expertise in the industry, Southampton University's Dale said.

University of California, San Diego's Takeo Hoshi agreed, as he pointed out the efforts Japan has put in over the past five years to boost transparency as a means to end the country's banking crisis.

"Organizational change can matter … but organizational change alone won't change policy very much," Hoshi said. He also noted that politics ultimately drove government institutions, and without political change, it would be difficult to implement any lasting and significant reform measures.

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