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Capture in Financial Regulation: Can We Channel it Toward the Common Good?

Lawrence G. Baxter

Duke Law School

May 19, 2011

Cornell Journal of Law and Public Policy, Forthcoming

“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.

Number of Pages in PDF File: 27

Keywords: administrative law, bank regulation, regulatory capture

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Date posted: February 27, 2011 ; Last revised: December 21, 2014

Suggested Citation

Baxter, Lawrence G., Capture in Financial Regulation: Can We Channel it Toward the Common Good? (May 19, 2011). Cornell Journal of Law and Public Policy, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1769203

Contact Information

Lawrence G. Baxter (Contact Author)
Duke Law School ( email )
210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-8540 (Phone)
HOME PAGE: http://www.law.duke.edu/fac/baxter/
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