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rbw/value-based-approach-financial-regulation-december-2012

A Value-based Approach to Financial Regulation (December 2012)

Rethinking Bretton Woods | Sun, Dec 16, 2012

By Aldo Caliari

A CIDSE paper applies Catholic Social Teaching principles to the regulation of the financial sector.

Four years after the fall of Lehman Brothers, the world economy continues to face the aftershocks of the crisis. Some indicators are the acuteness of the Eurozone sovereign debt and banking crisis, with most European economies on the brink of a recession if not suffering one already, as well as the continuation of tepid growth in the United States. But the risks are greater compared to the 2008 crisis because emerging economies, such as China, Brazil and South Africa, that then acted as the “engine of growth,” today face more precarious conditions.

Indeed, from a broader perspective that looks beyond growth of output, it is clear that the crisis never subsided.

 

The international alliance of Catholic agencies, CIDSE, believes that all actors in society should have a say in the design of economic policy and rules, including financial ones. Indeed the Church teaches us that: “In the economic and social realms, too, the dignity and complete vocation of the human person and the welfare of society as a whole are to be respected and promoted. For man is the source, the centre, and the purpose of all economic and social life.”

 

In a just-released background paper “A Value-Based Approach to Financial Regulation,” CIDSE identifies the following Catholic Social principles and teachings as relevant the task of assessing financial regulation from a value-based perspective:

- The need to place human dignity at the centre of economic life

- The Common Good

- The principle of subsidiarity

- Just distribution of wealth

- The social function of private property

- The Preferential Option for the Poor

- Care for the Earth

In CIDSE’s view, application of these Catholic Social Teaching principles and values to the regulation of the financial sector translates into four simple guidelines that should be used to practically assess any reform proposal. Financial sector regulation should:

1. Place the financial sector at the service of a real economy that is geared to the achievement of human rights, human well-being, the common good and sustainable development

2. Prevent financial crisis to the greatest possible extent, while making them less frequent and severe, with particular attention to sparing their negative impacts to the poorest and vulnerable

3. Promote the just distribution of wealth and income including the alignment of risk and rewards for financial market actors and protection of fair compensation for workers

4. Be the result of transparent and accountable processes that allow for all those affected in society to participate, while respecting subsidiarity

 

Using these guidelines, the paper assesses the ongoing international agenda of reforms in several areas: Too big to fail , Bank Capital requirements, Derivatives, Hedge funds and private equity funds, Credit rating agencies, Financial sector taxation and shadow banking. The final portion of the paper comprises a list of recommendations based on such assessment.