A safety TÜV test is what financial instruments need

Sir, I absolutely agree with Philip Augar that banking supervisors should go for bold, simple rules (“Too big to manage and regulate are what matter now”, June 29). While the Group of 20 has agreed on measures for the regulation of systemically important financial institutions and macro-prudent supervision, created institutions such as the Financial Stability Oversight Council in the US or the European System of Financial Supervision are unable to cope. Even transparency is not possible so long as financial instruments are too complex and arise too quickly.

Thus a key preventive and efficient measure at the base of financial regulation would be a “finance TÜV test”: a licensing of financial instruments. Financial institutions would have to prove that a certain type of financial instruments is useful in the real economy and also prove the risk-reward profile. Only instruments on the list would constitute legally enforceable contracts. Such a principle of negative legal enforcement has been applied in countries such as Austria, Germany and Switzerland until it was abolished due to deregulation about 10 years ago.

Financial instruments not on a positive list would either be prohibited or fall into a grey zone of legal insecurity, or be bound to conditions. For example, re-securitisation (securitisation squared) should be prohibited, as should derivatives for food speculation; simple insurances can be used to ensure price safety. A “finance TÜV test” would simplify the coming regulations. The phenomenon of institutions “too connected to fail” could shrink, too.

Suleika Reiners, Policy Officer for Future Finance, World Future Council, Hamburg, Germany