Multiple regulators are a better bet for diversified financial institutions. This is even as the Financial Sector Legislative Reforms Commission (FSLRC) has opted for a single or super regulator to replace those in equity, commodities, pensions and insurance sectors.

Is this a more efficient way of ensuring financial oversight? Many bankers and business men would point to the UK’s Financial Services Authority (FSA) as a case in point.

However, from the financial stability point of view, both forms of regulatory mechanisms failed; UK’s FSA watched as Northern Rock and then RBS collapsed, the multiple regulators in America had no clue as to what was happening or why it happened. Ask Ben Bernanke and Alan Greenspan.

In fact, the US has had multiple regulators and till 2008 the system worked efficiently. It’s got back to its feet, despite attempts by the Dodd-Frank legislation to create some sort of tighter regulatory overreach.

If we look beyond the interests of stakeholders as owners of capital, for whom of course rate of return is vital, then the question to ask is: how can one ensure financial stability, such that crises of the kind that have rocked so many regions, from Japan to Argentina to Cyprus over the past three or more decades, do not occur?

The answer would depend on a larger question -- the kind of financial structure we wish to create for the regulator(s) to police. Or, perhaps it might serve to ask what kind of structure brought the world to its knees in 2008.

The ‘universal banking’ model, aided by freeing of capital controls, made mincemeat of both forms of regulation — in the US, vast financial conglomerates could engage in regulatory arbitrage and exploit trans-border capital flows. The system of incentives for constant innovation of financial products which meant excessive risk-taking (of the kind that would have tempted some officials of private banks caught in the sting operation) created its own logic of success that, till 2008, explained itself even to the regulators working under laws radically altered to suit the universal banking model.

If both the super-cop and a clutch of regulators failed in the UK and US to prevent the crisis or at least stem it, though they did allow for its efficient working till 2008, then it is best to blame the financial architecture for whatever happened.

Before we address the FSLRC’s suggestions for a regulatory model, it might be useful to ask if we would like to replicate the models followed in the West: the conglomerate financial institution, the “too-big, too correlated too interconnected to fail” enterprise that stymied both the UK and US regulators.

If we decide to stay with diversified institutions, “with different ownership, incentives and objectives”, as Joseph Stiglitz put it in his recent lecture at the RBI, then, well-trained multiple regulators could be the best bet.

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