Law Commons^™

Deregulation Pas De Deux: Dual Regulatory Classes Of Financial Institutions And The Path To Financial Crisis In Sweden And The United States, Erik F. Gerding

Publications

This article presents the following model of two regulatory classes of financial institutions interacting in financial and political markets to spur deregulation and riskier lending and investment, which in turn contributes to the severity of a financial crisis: 1) Regulation creates two categories of financial institutions. The first class faces greater restrictions in lending or investment activities but enjoys regulatory subsidies, such as an explicit or implicit government guarantee, while the second class is more loosely regulated and can make riskier loans or investments and earn additional profits. 2) These additional profits leads to calls for deregulation to enable the …

Code, Crash, And Open Source: The Outsourcing Of Financial Regulation To Risk Models And The Global Financial Crisis, Erik F. Gerding

Publications

The widespread use of computer-based risk models in the financial industry during the last two decades enabled the marketing of more complex financial products to consumers, the growth of securitization and derivatives, and the development of sophisticated risk-management strategies by financial institutions. Over this same period, regulators increasingly delegated or outsourced vast responsibility for regulating risk in both consumer finance and financial markets to these privately owned industry models. Proprietary risk models of financial institutions thus came to serve as a "new financial code" that regulated transfers of risk among consumers, financial institutions, and investors.

The spectacular failure of financial-industry …