John Kay - Finance System & Regulations

On Wednesday 12th (May 2010), John Kay gave a lecture on the finance system and regulations. One question from the audience was: If we went back in time with all our knowledge to 2006/2007, would we be able to prevent Lehman Brothers from declaring chapter 11? The answer was: “We don’t want to prevent Lehman Brothers to go bust, this is capitalism! We want the regulators to allow them to go bust without taking the entire system with them.”

This led to many questions on how to regulate such conglomerates? John Kay has the answer in favouring structural regulations. In conglomerates, different sectors as asset management, securities selling, market creation, etc... all have conflicts of interest. The new structural regulation will help to create non-interdependent small robust resilient networks which will form a big system. This will enable to regulate capital by removing the arbitrage element of spreading capital in different sectors that fall under different regulations. Furthermore, this will make it possible to increase accountability of the chiefs in big organisations.

A second question was regarding the stakeholder’s society growing stronger, and what impact would that have on the new regulations? John Kay talked about an un-focused public anger which creates the need to break the political influence on the financial market and vice-versa. Once more, the resolution is in separating and compartmenting the structure of conglomerates. An example would be to put in place narrow banking through segmentation: on one side, small individual investors, and on the other, ‘casino game floor’ for conglomerates.

A third question was how to solve regulation’s own problems of asymmetry and capture? The answer was once more in structural regulations: regulators would be experts in organisation’s structure rather than behaviour, they will be un-bias and consistent within different sectors.