Regulators need to take a new approach

In April this year the G7 finance ministers, worried about growing financial turbulence, endorsed the approach to regulation presented to them in a report from an eminent group including the chairman of the United Kingdom's Financial Services Authority, the president of the Federal Reserve Bank of New York, and the chairman of the US Securities and Exchange Commission.

The committee was repeating the tired trinity that has defined financial regulation for the past three decades. The trinity failed - and without a new approach the regulators will fail again.

That failure had two closely related origins. Regulation failed to keep up with the institutional changes that in 30 years have transformed financial markets; and the regulators accepted that firms had the technical skills, expressed in mathematical risk models, to manage risk better than the regulator could.