The Journal The Authority on Global Business in Japan

Paul Schott Stevens

Paul Schott Stevens

In the wake of the 2008 financial crisis, systems were put in place to stabilize the economy. Multiple regulations were rolled out worldwide—mostly under the duress of banks—to address weak areas. In some ways these measures have achieved stability, but overregulation is a growing problem for some industries and markets.

On October 19, Paul Schott Stevens, president and CEO of Investment Company Institute, gave a thought-provoking speech to members of the American Chamber of Commerce in Japan. He asked: “Has the wave of financial regulation from Washington in the aftermath of the financial crisis gone too far?”

With four decades of experience in Washington, Stevens is no stranger to the ins-and-outs of regulatory politics. And from his perspective, the wave of regulations coming out of Washington will not ebb any time soon.

Many of the regulators appointed by Washington are bank lawyers. Stevens says this is a problem because “Everyone takes the limits of their own field of vision to the limits of the world,” and the constraint on financial institutions is unrelenting—not just in the United States, but in other jurisdictions.

Public perception of finance, capitalism, and free markets has shifted, and faith in the system has faltered. However, Stevens explained that implementing more regulations has a “direct bearing on other, more sweeping societal concerns.” In particular, he focused on growth, innovation, and opportunity.

“The time has come to pause and take stock.”

Stevens suggested that a more robust system was the way forward. The idea of stability should be simply to return the system to its original state after the shock of the crisis.

Although not arguing against regulations, Stevens emphasized that the current approach is in need of an overhaul. Of course, regulation is needed to rebuild trust with investors, but there are limiting factors to consider.

The capital markets highlighted were those of the science, technology, and engineering industries. “They are all concerned with highly complex systems and are in contrast to stable systems,” he said.

A robust system is adaptable, and will allow the market to meet the changing needs of investors. Capital market participants will accept and manage risks based on “clear disclosure and the prospect of commensurate reward,” he said.

Further to this, robustness is what will encourage and endorse innovation and growth. “After all, banks don’t fund startups and ventures, and the creativity that we want within the economy,” he added.

Conversely, stable systems are bank-centric, which Stevens describes as being “rigid” and only providing a “one-size-fits-all” solution. These systems narrow down the sources of financing, creating dependence on large, highly leveraged institutions for funding. And this, he said, will hamper innovation and risk.

Stability should not be the goal itself; it should simply be a means to ensure sustainable growth rather than to eliminate risk and jeopardize growth.

Stevens explained that, in Japan, the system is beginning to witness change, turning “risk averse savers into risk-taking investors, therefore [spurring] economic expansion.”

Financial services are essential to economic growth, and many in the financial services sector view regulations that are being imposed as hampering prospects for their companies.

The banking system is becoming less important, while asset management is becoming more so. And the regulatory model that has been used in a banking context can’t simply be applied to asset management without very significant social cost.

The way forward, according to Stevens, is engaging in dialogue. Financial services companies should be looking to get involved in the regulations conversation, and “not accept this as fate. Voices need to be raised around this.”

Maxine Cheyney is a staff writer for The Journal.
Regulation is needed to rebuild trust with investors, but there are limiting factors to consider.