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

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

Capture in Financial Regulation: Can We Redirect It Toward the Common Good?

“Regulatory capture” is central to regulatory analysis yet is a troublesome concept. It is difficult to prove and sometimes seems refuted by outcomes unfavorable to powerful interests. Nevertheless, the process of bank regulation and supervision fosters a closeness between regulator and regulated that would seem to be conducive to “capture” or at least to fostering undue sympathy by regulators for the companies they oversee. The influence of very large financial institutions has also become so great that financial regulation appears to have become excessively distorted in favor of these entities and to the detriment of many other legitimate interests, including those of taxpayers, smaller financial institutions, and the promotion of general economic growth. So “deep capture” by the larger elements of the financial industry of the regulatory process might well have become a very significant problem. At the same time, it is unrealistic to assume that participants in the policy making and policy implementation process will not be trying to exert influence on the outcome of any regulation that impacts them. Attempts to maximize influence are surely an inevitable element of the ongoing regulatory process. And it is unrealistic to try to avoid extensive industry input altogether. Regulators and regulations depend on frequent and sometimes intense interaction with various sectors of the industry. To promote sound regulatory policy, we should renew efforts to shape the environmental conditions in which the competition for regulatory outcomes takes place, so that policy more favorable to the general public interest becomes more likely. This involves a combination of measures, many of which are quite traditional but some of which are too often neglected. Such measures might include: strengthening “tripartism,” advocated by Ayres and Braithwaite, by facilitating broader interest group participation in the regulatory process; limiting the influence of dominant participants by reducing their scale; properly structuring, resourcing and supporting regulatory agencies and regulators; “rotating” regulators so that they are less likely to develop unduly empathic relationships with the institutions they regulate; tightening the rules governing the “revolving door;” and making greater use of independent consultative and review bodies

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