Financial thought leaders gathered at SIFMA’s 2016 Annual Meeting, The Capital Markets Conference, to discuss regulatory calibration. The moderator, Sandra O’Connor, Chief Regulatory Affairs Officer at JPMorgan Chase & Co., kicked off the discussion with a question: “Have we earned the right to take stock of where we are on global and local regulatory procedures?” All panelists answered in the affirmative.

The panelists discussed regulatory calibration, as well as how to achieve an efficient balance of regulation and risk.

“Banks make a substantial contribution to the vitality of the US economy. The relationship of regulation and capital to growth is subtle and complex,” said Donald Kohn, Senior Fellow of Economic Studies at the Brookings Institution. “We can’t let the current state of the economy interfere with stock-taking.”

The panelists also discussed which international actors are role models with respect to regulatory calibration. “Bank of England has made some recommendations to the Basel Committee about how to tweak the leverage ratio so it’s not quite so inhibiting to trading activity, without losing much resilience,” said Kohn. “Stock-taking would facilitate a number of ways in which you could reduce the unintended consequences of existing practices without having to sacrifice anything.”

“Anyone that says a law passed by Congress is perfect and doesn’t need to be changed ought to go read a few of them. It’s not perfect and if you can make it better, you shouldn’t be afraid to make it better.”
– Governor Jay Nixon, 55th Governor of Missouri

In the post-crisis financial regulatory environment, regulators, policymakers, and the financial services industry can work together to provide transparency, the panelists agreed. Conducting cost-benefit analysis “is like explaining your work,” said Dan Gallagher, president at Patomak Global Partners. “It’s walking through a thought process. What were the trade-offs? Why did we decide to do one thing over another? That’s a layer of transparency in the process. Even if you disagree with the end result, it’s very good for the public to see how you got there.”

The panelists acknowledged that regulations cannot be treated as blanket policy. “I don’t think that everything needs to be regulated like banks,” said Annette Nazareth, partner at Davis Polk & Wardwell. “If you have concern about an activity, regulate the activity. We might need more protections, but what we really need is more data.”

“The U.S. financial system is the most efficient, effective, best regulated market in the world. We don’t need more regulation; we need better regulation.”
– Henry M. Paulson, Jr., Former Secretary of the Treasury and Chairman, The Paulson Institute

On the topic of new and changing financial products and systems, the discussion centered around diversity. “A diversified financial system is a more stable, resilient financial system,” said Kohn. “We need to encourage the diversification of financial activities; some of them leaving the traditional banking sphere may not be systemically important.” He noted the importance of identifying whether there is a downside to activities migrating away from the most heavily-regulated entities.

To help achieve greater regulatory calibration, some of the panelists emphasized the importance of quality metrics. “What markers are we looking for to see if the current standardized approach is pointing away from access to financial groups and products?” asked John Dugan, partner at Covington & Burling LLP. He stressed the need to focus on building better frameworks: “A better way to go would be to build risk models that stood the test of time. We’re only slowly getting there. You need the confidence of the regulators in those risk models and it’s not there yet.”

Panelists agreed that regulatory harmony is a process. “We’re not done with rulemaking,” said O’Connor. “Calibration and coherence matters, here and around the globe.”

Ira D. Hammerman, Executive Vice President and General Counsel, SIFMA