In my view there are many reasons why we have regulatory capture. Fixing the problem is also very complicated, particularly in the American culture. We simply don’t take regulation seriously enough as a society. Indeed, because it seems counter to the “free market” philosophy we all share, becoming a regulator is sometimes portrayed as a sign of failure. ”Real men” would be out there actually making the economy work.
Regulators are outgunned. Moving the existing regulatory apparatus is going to take time. Typically regulators are running quarters, if not years behind the actual developments in the marketplace. That is the nature of working with historical information. There are delays in every step of the process. Data must be produced, compiled into reports, reviewed and scrubbed and then is given to regulators. Data is not volunteered. Only what is asked for is provided.
Here is a new suggested approach. Follow the money. The incentive money. Incentives are calculated and tracked at all times. They may be paid annually, or in the case of some business lines, quarterly or even monthly. But staff knows where they stand at all times. Incentives are the meter that coincides with business drivers. That is how ingrained they have become in the corporate apparatus.
Regulators must be embedded into the Performance Measurement/ Compensation departments of all major firms as well as into their business lines. They should have access to any information they request at any time. They should have robust field communication amongst themselves. They must be given system access. They should take rabbit trails and discover what is going on, like detectives investigating a crime scene. The detective controls the scene. They should gather evidence.
As incentive results are generated, as close to real-time as possible, regulators should look at the transactions that are generating the largest incentives and should look at shifts in the incentive patterns. When they see data, they should be allowed to go direct to the bankers without any intermediary protocols and ask any questions they want. Then they look at the transactions themselves and make adjustments and deploy resources on the fly.
Where do you find and highly motivated regulators? Form a Swat Team that is given a lot of operational latitude. Recruit them from inside the industry and pay them well.
Finally, the institutions need to know that these embedded regulators will have broad powers including the power to refer to law enforcement for fraudulent activity.
Corporations will fight this tooth and nail. But it is no time for Congress and the President to declare victory and go home. There has not been a victory from the standpoint of regulation. Too Big to Fail is still there. Many Fed Regional Bank heads do not believe the regulation has gone far enough. Therefore, the implementation of the regulation must take up some slack. Put Elizabeth Warren or another like her in charge and form a Swat Team. Increase the regulators budget like we did for Homeland Security after 9/11 and get people in there that are not “captured”.