In this third part of the series analysing the sagacity of creating a super regulator for financial services, we examine benefits in the area of human resource management that could be derived from having a super-regulator vis-?-vis the current arrangement of sectoral regulators. Since it is the people that make or break any organisation, a sound regulatory system requires talented officials that can match the abilities of employees working in the entities that are being regulated.
In this context, it is pertinent to point out the following fact. In each of our regulatory institutions, only a handful of officials at the entry level are drawn from the top management schools in the country. In contrast, in the leading private banks of the country and foreign banks, a majority of the officials at the entry level are drawn from the top management schools. This difference matters for two important reasons.
First, given the increased use of financial engineering through securitisation as well as the use of financial derivatives, the importance of specialised expertise has increased manifold. Therefore, substantial differences in hiring policies between the regulated entities and the regulatory institutions can engender a grave danger to the financial system and, in turn, the macro economy. In sporting parlance, the umpire needs to be as smart and possess as much specialised expertise as the players themselves. Given the increased role of securitisation and financial derivatives, talent that is schooled in these specialised areas of expertise needs to be incentivised to join the regulator. Differences in human resource policies can have detrimental effects for another, more cynical, reason. Given the nature of the selection processes for our top schools such as the IITs and IIMs, students that get educated at these institutions differ in one significant, albeit negative, characteristic?the ability to play the system better.
On average, students from these institutions may be smarter than those from other institutions. But, the cut-throat competition in these institutions teaches these students to first understand how the system works and then to work the system itself. When many of the regulated entities hire personnel that have ingrained into their DNA the ability to beat the system, the regulatory institutions need to possess similar personnel who can call their bluff. While I do not intend to allude that personnel hired from these institutions are the equivalents of diamonds, the point I am making is that the regulatory institutions need to hire people that possess (i) the specialised expertise needed to operate in today?s markets; and (ii) the street smartness that is needed to bring to light the suspicious activities indulged in by overzealous market participants.
Since regulators are public sector entities, they face similar challenges to those encountered by other public sector firms in attracting and retaining talented personnel. Providing compensation that is competitive with respect to industry standards is difficult. Though the perks and perquisites may be substantial, it is difficult to attract and retain the best talent that is available in the country without providing them challenging and enriching job content. While modifying the human resource policies at the regulatory institutions is an issue that demands first order attention, having a super-regulator can facilitate the hiring of the best talent in the country. Since super-regulator would span banking, insurance and securities sectors, rookies can be promised attractive job content.
As a single large employer of financial regulators, a unified agency would be better equipped at providing its employees exposure to all the different segments of financial markets when compared to sectoral regulators.
Further, compared to sectoral regulators, the super-regulator would be better suited to design firm-wide human resource policies that would be consistent across all sectors. Such firm-wide human resource policies can be utilised gainfully to formulate a rewarding career path for people hired from the top schools.
A super-regulator could have other subsidiary benefits with respect to the quality of human resource management. First, the super-regulator could foster the exchange of specialists between segments to support different supervisory functions. Such sharing of expertise has become critical given the emergence of financial conglomerates and the risks that they pose to the financial system. Second, the super-regulator can lead to sharing of best practices currently ingrained in each of the sectoral regulators. Further, the pooling of expertise can also lead to the development of best practices that can be commonly applied across all the market segments. Finally, efficiency gains may arise from the coordination of supervisory work on issues of mutual interest as well as from the pooling of common support staff and departments.
The author is assistant professor of finance at Emory University, Atlanta, and visiting scholar at ISB, Hyderabad