COLUMN: Close Regulator Training's Old School

Article excerpt

Byline: Eugene A. Ludwig

For centuries, professionals relied upon apprentice systems to pass down knowledge. In medicine and law, on-the-job instruction from an older generation of masters was the chief way to train in the profession. Over time, however, formal study superseded the old methods. Case studies became a cornerstone of legal education; adherence to the scientific method came to define medical and other educational endeavors. Great institutions of learning established professional schools and helped to elevate both the standards and the prestige of medical, legal and other careers.

Training for a career in financial regulation and supervision, however, remains a pursuit that is learned largely by doing. When a major bank supervisory agency needs new examiners, it trains its own.

Though there is much to be said for the apprenticeship system, expanding upon this model of learning can benefit not only the student, but also the entire field of study. The time has come to take steps to elevate the prestige and professionalism of supervision as a career, and as a body of knowledge.

Just last week, while I was outside the United States, I asked a very distinguished non-U.S. bank regulator what science there was behind the selection of leverage capital numbers.

The unsurprising answer was that there is none. Whether capital should be 2%, 4% or 8% is essentially a gut decision-well meaning, of course, and based on a level of experience, of course, but without the benefit of the kind of data-based study and analysis that we should expect for such an important decision. The same can be said to an even greater extent about dozens if not hundreds of rules imposed globally by financial services supervisors. These rules are too often based on history and often logic but do not benefit from scientific or academic study and consideration.

This is not to say that there have been no advances in the area of supervision or regulation, nor that many practitioners are not able and expert. We are in fact fortunate to have cadres of dedicated, talented and hardworking examiners and regulators-most of whom could have pursued more lucrative opportunities in the private sector. The Seidman Center offers useful courses for bank supervisors, as do some banking schools around the country (though the latter are chiefly and properly focused on educating bankers, not regulators and supervisors). …