Did We Tame the Beast: Views on the US Financial Reform Bill

Prof. Lawrence Baxter takes a microscope to the ‘Dodd-Frank’ Bill (Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173) finding a veritable ’Micrographia’ of doubt. The Bill was devised to address problems associated with the global financial crisis of 2007-2009. This paper was written in anticipation of the US Financial Reform Bill’s passage through Congress. The legislation has since been enacted as Public Law No. 111-203, signed by President Obama on July 21, 2010

Understanding Regulatory Capture: An Academic Perspective from the United States

Although it sometimes seems that financial regulatory agencies have been entirely captured by the larger players in the industry they regulate, a closer examination reveals that a variety of factors contribute to policy outcomes in this arena. Agencies have different agendas and stakeholders, and banks often perform quasi-governmental roles that blur the line between the captors and the captured. The real danger is that public policy can be distorted as a result of excessive influence by one set of interests at the expense of others. This danger is best thwarted or at least mitigated through the application of a range of institutions and processes, ranging from external checks on agency action to a strengthening of institutions designed to represent interests that the regulated industry itself is unlikely to promote. Internal checks that might provide incentives for more public-oriented actions on the part of industry participants are also relevant

Fiduciary Issues in Federal Banking Regulation

It is argued that the fiduciary duty being claimed by banking regulators against depository institutions arising out of the S&L scandal is actually a distinct statutory duty

Adaptive Financial Regulation and RegTech: A Concept Article on Realistic Protection for Victims of Bank Failures

Frustrated by the seeming inability of regulators and prosecutors to hold bank executives to account for losses inflicted by their companies before, during, and since the financial crisis of 2008, some scholars have suggested that private-attorney-general suits such as class action and shareholder derivative suits might achieve better results. While a few isolated suits might be successful in cases where there is provable fraud, such remedies are no general panacea for preventing large-scale bank-inflicted losses. Large losses are nearly always the result of unforeseeable or suddenly changing economic conditions, poor business judgment, or inadequate regulatory supervision—usually a combination of all three. Yet regulators face an increasingly complex task in supervising modern financial institutions. This Article explains how the challenge has become so difficult. It argues for preserving regulatory discretion rather than reducing it through formal congressional direction. The Article also asserts that regulators have to develop their own sophisticated methods of automated supervision. Although also not a panacea, the development of “RegTech” solutions will help clear away volumes of work that understaffed and underfunded regulators cannot keep up with. RegTech will not eliminate policy considerations, nor will it render regulatory decisions noncontroversial. Nevertheless, a sophisticated deployment of RegTech should help focus regulatory discretion and public-policy debate on the elements of regulation where choices really matter

Capture Nuances in the Contest for Financial Regulation

Applying capture analysis in the hotly contested arena of financial regulation is difficult. Numerous regulators with widely differing missions and widely diverse stakeholders are involved. Regulators operate under widely differing authorizing legislation. They even function at different levels of government. Agencies are often at odds with each other when it comes to determining optimal public policy. Unlike policy disputes in many other areas of regulation, which can be settled by reference to scientific data, public policy in financial regulation rests profoundly on essentially contested economic ideologies. This makes financial policy doubly difficult: one the one hand, it requires deep expertise—and therefore agency, as opposed to legislative—determination; on the other, this expertise must be informed by prevailing perceptions of which economic principles are most plausible, even though these principles are seldom actually verifiable. It is also often overlooked that financial institutions—banks in particular—perform quasigovernmental roles, such that close cooperation between the regulators and the regulated is not only inevitable but also indispensable. “Capture” is therefore often just a confusing term of regulatory analysis because it rests on shallow perceptions of the regulatory process. Stakeholders and even the agencies themselves inevitably “contest” for the policies they deem most desirable. What is important is to prevent, as far as possible, undue influence by certain stakeholders at the expense of others, and the adequate representation of alternative views in the combative arena of policy competition. The principles of democratic participation remain the important guiding light for financial regulatory reform. This article reviews the fragmented nature of the regulatory process in finance, the close relationship between banks and government, and the emerging forces that might help to make the policy contest more balanced