Guide to Analysing Companies

THE CHANGING FACE OF MARKETS
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1990s to reduce the number of regulatory bodies – the UK, for
example, has a single omnipotent Financial Services Authority –
the United States has been reluctant to tamper with the jurisdic-
tions held by such bodies as the Federal Reserve, the Securities
and Exchange Commission (sec) and the Commodity Futures
Trading Commission. As a result, duplication among agencies
abounds.
Nevertheless, there is little doubt that regulators, particularly
those that preside over the world’s most sophisticated financial
centres, are now co-operating much more than they used to
even a decade ago. Although no single regulator oversees the
giants of international finance (nor perhaps is one ever likely to),
such firms are watched closely wherever they trade in the de-
veloped world. The key to effective regulation and smooth-
running financial markets is transparency as well as the free
flow of information. 
One hope is that the improved regulation of banks will
provide early warning of dangers. Under the Basel rules of the
1980s, banks have had to link the amount of capital they must
hold to the level of risk carried by the loans they make. This
sounds fine in principle but does not always work in practice.
Critics claim that the system is too crude: banks have to set aside
as much capital for a loan to General Electric as they do to a
hotelier in Poland. Basel 2, a more sophisticated version of the
rules, is being drawn up by the central banks of the developed
world. It would cover many more banks worldwide. Yet central
bankers have found it difficult to agree on the scope of the new
rules and how they should be applied. For example, some want
more leeway for banks lending mainly to small businesses
because, in theory, the risks are fewer. Originally planned for
2004, the introduction of Basel 2, as the new rules are known,
has been delayed until 2006, and even that may be in doubt.
Better regulation of banks may reduce the chances of a col-
lapse in the financial system, but should regulators also be
thinking about ways of preventing the investment bubbles that
lead to capital being misallocated in the first place? Until the
dotcom bubble burst, the answer was invariably no. Advocates
of efficient market theory argued that the system was inher-
ently self-correcting. In efficient markets, prices are assumed to
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