The financial crisis of 2008 had forced an overhaul of law, regulations, crisis management, and a new language.
The word ‘crisis’ underwent a powerful restructure. Crisis, it is hoped now, is used more fluidly, in more advanced stages of corruption and disintegration, rather than absolute economic and financial bankruptcy. The ‘crisis’, as it were, helped us re-frame our priorities as well – who to protect, and how to define protection, and what it means to be ‘safe’.
Last year, as we were inundated with a flurry of academic articles examining the decade post the financial crisis, we came to understand that more than the regulatory tools and shifts in market structure that were engineered to assess and predict risk, what we really gained from the financial crisis was ‘perspective’.
This perspective was defined by our collective admission of failure, of understanding that our failure also meant a failure of designs and systems. Some of the world’s biggest regulators admitted to this – the UK, US, Europe; and promised us a golden ticket to safety.
Less than a year later, we have been forced into, almost in Biblical terms, into another deluge – of infections, suffering, and a ‘crisis’ that has remained for many decades, truly exceptional.
The word ‘safety’ and ‘crisis’ are undergoing changes both in medical and financial terms. In this context, it deserves some merit to understand what words mean in a global financial crisis, what they have meant historically, and what they will continue to mean for the foreseeable time to come.
The importance of vision statements and language
The first response to a crisis often comes to us from regulators in the form of vision statements.
They are usually issued right at the beginning of a crisis period and therefore are important from the point of view of chronology and historicity of reforms. They are often the regulator’s first point of communication with the wider population, issued through multiple media, aimed to be direct, and to lay out a brief for the times to come. In effect, they craft the public imagination about the actual impact of the crisis.
The vision statements issued by financial regulators also give us tremendous insight into the objectives of forthcoming regulations, who will be protected and how much; and whose priority comes into sharper focus. More importantly, they show us which regulators are more empathetic and foresighted – who responded when, and what did it take for them to assume charge and admit to rising challenges.
As such, statements of empathy and admissions of challenges should be far more important and useful to the population than blanket statements of power and assurances of fiscal and monetary strength.
The ease of access to data, the availability of flexibility within existing structures of law and policy, relaxation measures and the length of duration, and regulatory responses issued without public prompt and a higher incidence of suffering will be important parameters to understand the role and language of regulation. This will tell us if we need our regulators to reform and adapt, or continue on their chosen mandates and paths crafted during different periods in history, and suitable perhaps to different kinds of ‘crisis’.
These statements also stitch the bare bones of future policy.
An examination of the language used in these statements also reveals the priorities for regulators, and vice-versa. Key omissions therefore serve to further entrench existing structures of power and privilege.
The importance of language in vision statements and largely in regulation as a whole cannot be stressed enough. In a wonderfully exploratory work by Amadxarif, Brookes, Patel and Walczak (2019), it was found that the financial crisis of 2007–08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words.
Their work focused particularly on linguistic complexity, both textual and network, found that as regulators sought to encode additional real world complexity, there was an increase of linguistic complexity. The authors focused on several forms of linguistic complexity, including the ‘length’, i.e., on the amount of linguistic material a reader has to retrieve, integrate and keep in working memory for comprehension, the ‘lexical diversity’, i.e., the proportion of new concepts that inhibited faster comprehension, and the use of ‘conditional clauses’ requiring integrating different exceptions or constructing hypothetical events.
As we begin to chart the scope of regulatory responses in India, we must be aware of these additional complexities of financial regulation, which will undoubtedly add to the stress of the current crisis, which, at least in the short run, will apply the same regulatory infrastructure to present times.
Methods of examining financial regulation
It is perhaps too early to sound out an alarm and come to reductionist conclusions about the Indian financial regulators’ responses to COVID-19. However, there is some benefit to understanding what needs to examined, perhaps with sharper focus in the coming times. As we progress in this lockdown in India, and the general global crisis, these are the following questions we should be asking.
Ease of access to regulation
There should be a concerted effort to understand if financial regulatory responses are comprehensible by people in general.
Further, if the language used by regulators are inclusive; who are the subjects of regulations, and what is the tenor of the regulatory responses deployed (are guidance being issued, relaxations, conduct or macro-prudential regulation)?
Is there an effort to display comprehensive reforms, or a unified information platform for people and businesses?
Proactivity of regulation
A key question that should be asked is, who responded to COVID-19 and how? What did it take for regulators to respond (measurement can be through a simple global comparison of infection rate/reports of suffering)?
Were existing infrastructures flexible enough to adapt to the rising challenge? Is more research being commissioned to undertake proactive policymaking?
Is there an admission of guilt, or the benefit of foresight that is being conveyed to people – speaking directly to transparency and accountability?
Specificity of objectives
As Aikman’s paper (2018) demonstrated, a regulatory regime without well-defined objectives is likely to suffer greater problems of time-inconsistency, and increase uncertainty among outside participants about the likely regulatory policy reaction function.
Therefore, it will be critical to ask of regulators if they have defined objectives, if they are in fact willing to change them, and how transparent the objectives of policies are to the people being governed.
The 2008 financial crisis exposed the need to extend the field of financial regulation, particularly as a response to systemic shocks, to include non-bank parts of the financial system as well.
This was a natural consequence of having ignored the proliferation of shadow banks, and deep interconnectedness of the financial system.
Therefore, the prudent regulatory response was to think critically about non-bank components of the system, central counterparties, liquidity and market risks of associated funds and investment vehicles, and ‘too big to fail’ entities.
What is, therefore, the macro-prudential response to COVID-19?
The role of central banking
This question is important particularly in India, where the apex bank and the regulator has expansive powers under a colonial legislation, expanded time and again to encapsulate newer markets and areas of supervision.
A far more important debate needs to happen over the political economy of financial regulation, in India and elsewhere – the separation of powers, the degree of independence from spheres of political power and processes, the degree of discretion to be awarded to powerful regulators, and how regulators seek to hold themselves accountable to those they seek to serve.
The costs of financial intermediation
While there has been significant research that has gone into establishing the merits of having more financial intermediation, there is a larger conversation that needs to happen over the methods adopted to do so, and the costs associated with it.
In India, where financial intermediation has overlapped with a national digital identification program, and a ration plus social benefits disbursement tool, the pertinent question of the costs of intermediation must be asked in the particular context of systemic oppression and exclusion.
As the impacts of the crisis increase in India, it is important to understand that over the past century, there has been significant change in the structure of the financial system, including in the scale, structure and scope of financial regulation and the safety net.
Those changes could mean that simple historical comparisons of regulatory standards could be both misleading, and simply untrue in the context of a pandemic evolving into a financial crisis. Therefore, while it is hoped that more thinking and research is conducted, we are also able to build more context into the words and numbers we analyse, and be open to the chasms of uncertainties and knowledge gaps that an evolving pandemic such as this will necessarily encompass.
At many times, our erudite understandings and eclectic policymaking itself may inadvertently ignore the lived realities of those at the frontlines of this disease – the poor, the elderly, the women, the queer, people of colour, the homeless, the medical staff, the informal economy, the migrant workers, the refugees – those already at the margins of our society due to their caste, religion, gender identities, race; pushed now perhaps to the very edge, with the threat of disappearing altogether.
It is hoped that research is pursued with these constructs in mind, and for good reasons language is going to be our first point of reference for uncovering a lot of truths.
“Each sentence realised or dreamed jumps like a pulse with history and takes a side. What I say in any language is told in faultless knowledge of skin, in drunkenness and weeping, told as a woman without matches and tinder, not in words and in words learned by heart, told in secret and not in secret, and listen, does not burn out or waste and is plenty and pitiless and loves.”
Dionne Brand’s words from No Language is Neutral, originally written in the context of post-colonial understanding of the history of the Atlantic trade, and language, ring true.
Shohini Sengupta is building a global financial regulatory response tracker to examine the methods and tenor of financial regulation as a response to COVID-19. She teaches financial regulation at the Jindal School of Banking and Finance. She tweets at @shohinisengupta.