You are here

Regulation failure poses the greatest risk to financial systems

FAILURE of regulation poses the greatest risk to financial systems, while cooperation among regulators would help to mitigate risks, said Duvvuri Subbarao, former governor of the Reserve Bank of India.

Regulators fail not because they are incompetent, negligent or stupid but for reasons beyond their control, said the former central banker on Monday at a debate on balancing opportunities and risk for finance.

Arguing passionately for his case, Mr Subbarao said regulators have to manage the tension of fostering innovation and preserving financial stability. But if they come down hard on safety, they forgo the benefits of innovation, he said.

"Regulators have to be vigilant, (they) all want to promote business," he said.

Market voices on:

Mr Subbarao was among a group of panelists who were taking part in the 4th OMFIF Asean debate, co-organised with the Monetary Authority of Singapore (MAS), an event preceding this week's 4th Asean Finance Ministers and Central Bank Governors' meeting.

The collapse of US investment bank Lehman Brothers 10 years ago set off the global financial crisis and he noted the regulator's part in allowing subprime mortgage derivative products. Lehman was the biggest underwriter of mortgage-backed securities which had been seen as innovative hedging products.

When the US government refused to rescue Lehman Brothers, the subprime mortgage crisis in the US soon spread to become a global financial crisis and the price is still being paid today, he said.

The difficulties regulators faced is to know where the risks lie because financial markets are borderless.

Mr Subbarao said if the MAS suppresses or tightens the regulation on fintechs, these companies can go to India or Indonesia and "if there's a bust-up, it can spread to Singapore too".

"Cooperation among regulators is necessary, but regulators may fail to reach an understanding because they are carried away by short-term national interests," he said.

On cybersecurity, Mr Subbarao said it cannot be left to the private sector to police themselves but national regulators and governments have to take charge and be responsible.

There must be international cooperation and collaboration among the regulators "but to agree on common standards of cybersecurity is very difficult", he said.

Others on the panel argued for companies to act responsibly or for collective responsibility but Mr Subbarao said that Facebook's recent crisis shows the limitations of leaving it to the private sector.

Facebook is facing a firestorm on how data of 50 million Facebook users fell into the hands of Cambridge Analytica, the firm which allegedly helped Donald Trump win the 2016 US presidential election.

At the end of the debate, Mr Subbarao's powers of persuasion were evident. 44 per cent of the audience voted to agree that failure of regulation poses the greatest risk to financial resilience, up from 25 per cent when the vote was taken before the debate.