Financial innovation

In Defense of Regulatory Diversity

Guest post by Lawrence J. White, Robert Kavesh Professor in Economics, NYU Stern School of Business

The U.S. regulatory landscape--especially with regard to financial regulation—is maddeningly complex.  It is easy to make a case for a drastic simplification, and the authors of this blog have done so here. But there is value in diversity—including regulatory diversity. Consequently, with regard to the regulatory framework, as is true of most other areas of political economy, we need to consider the costs as well as the benefits of any proposed changes.

Let’s start with the undeniable complexity of U.S. financial regulation: Consider the following array of agencies and jurisdictions (an alphabet-soup glossary appears at the end)...

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The Regulatory Counterintelligence Agency

Some days the tone of the financial news matches that of the sports page. Adversaries appear to be locked in an epic battle, with the official sector setting regulations in an attempt to keep the system safe on one side,  and financiers pushing for rules that ensure profitability on the other. The skirmish over the level of large bank capital requirements and the clash over whether municipal bonds can be used to meet liquidity requirements are just two recent examples. (See our earlier posts here and here.)

Following the day-to-day struggle can make it hard to see who is winning. But if history is any guide, the financiers will prevail—to the benefit of their owners and managers—at the expense of systemic fragility.

Can we change this? Can we create a system with greater balance between the authorities and the institutions?

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