The Pathologies of Banking Business As Usual

University of Pennsylvania Journal of Business Law, Vol. 17, p. 861, 2015

Suffolk University Law School Research Paper No. 14-29

64 Pages Posted: 8 Oct 2013 Last revised: 7 Jul 2015

See all articles by Hilary J. Allen

Hilary J. Allen

American University - Washington College of Law; American University - Washington College of Law

Date Written: 2015

Abstract

The Wolf of Wall Street’s Jordan Belfort is the latest popular culture depiction of the “banker behaving badly” we love to hate. However, the Jordan Belforts of the world do not cause financial crises – the reality is far less sexy. This Article argues that financial crises are caused by ordinary financial industry personnel engaging in everyday behavior that is not fraudulent, but nonetheless has the potential to generate huge social problems in its quest for short-term profits. In particular, this Article focuses on the destabilizing potential of complex innovation and leverage – two pathologies of banking business as usual. This Article argues that criminal law, private litigation and command-and-control regulation are all limited in their ability to restrain these non-fraudulent but destabilizing behaviors, and so we must also address the prevailing “Wall Street” culture that promotes these behaviors with little regard for their social costs.

Many proponents of financial regulatory reform have ignored the issue of industry culture – perhaps because the problem often seems intractable. Instead, most reform efforts have tinkered around the edges of destabilizing behaviors, with the tacit understanding that the industry will constantly arbitrage regulations in an endless cat-and-mouse game. However, we need not be entirely fatalistic about financial industry culture: there is a large empirical literature that demonstrates that people often do make sacrifices for the public good, and this Article is the first to use this “prosocial” literature to inform proposals for financial industry reform.

It would be pretty shallow to attribute the cultural pathologies of Wall Street at their roots to bad people working there. The trouble, instead, is that the structural conditions of the financial industry have fostered certain cultural norms. If you are designing policies to fix Wall Street, you need to take into account how they will shape that culture.

Suggested Citation

Allen, Hilary J. and Allen, Hilary J., The Pathologies of Banking Business As Usual (2015). University of Pennsylvania Journal of Business Law, Vol. 17, p. 861, 2015, Suffolk University Law School Research Paper No. 14-29, Available at SSRN: https://ssrn.com/abstract=2336678 or http://dx.doi.org/10.2139/ssrn.2336678

Hilary J. Allen (Contact Author)

American University - Washington College of Law ( email )

4300 Nebraska Ave NW, Washington, DC
4300 Nebraska Ave NW, Washington, DC
Washington, DC 20016
United States

American University - Washington College of Law ( email )

4300 Nebraska Ave NW, Washington, DC
4300 Nebraska Ave NW, Washington, DC
Washington, DC 20016
United States

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