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Regulating Financial Change: A Functional Approach, Steven L. Schwarcz
Regulating Financial Change: A Functional Approach, Steven L. Schwarcz
Faculty Scholarship
How should we think about regulating our dynamically changing financial system? Existing regulatory approaches have two temporal flaws. The obvious flaw, driven by politics and human nature (and addressed in other writings), is that financial regulation is overly reactive to past crises. This article addresses a less obvious but arguably more fundamental flaw: that financial regulation is normally tethered to the financial architecture, including the distinctive design and structure of financial firms and markets, in place when the regulation is promulgated. In order to effectively address future crises, this article argues, financial regulation must transcend that time-bound architecture. This could …
Perspectives On Regulating Systemic Risk, Steven L. Schwarcz
Perspectives On Regulating Systemic Risk, Steven L. Schwarcz
Faculty Scholarship
This book chapter, which synthesizes several of the author’s articles, attempts to provide useful perspectives on regulating systemic risk. First, it argues that systemic shocks are inevitable. Accordingly, regulation should be designed not only to try to reduce those shocks but also to protect the financial system against their unavoidable impact. This could be done, the chapter explains, by applying chaos theory to help stabilize the financial system. The chapter then focuses on trying to prevent excessive corporate risk-taking, which is one of the leading triggers of systemic shocks and widely regarded to have been a principal cause of the …