Abstract

http://ssrn.com/abstract=2374496
 


 



Derivatives and Deregulation: Financial Innovation and the Demise of Glass-Steagall


Russell J. Funk


University of Michigan at Ann Arbor

Daniel Hirschman


University of Michigan at Ann Arbor

January 4, 2014


Abstract:     
Just as regulation may inhibit innovation, innovation may undermine regulation. Regulators, much like market actors, rely on categorical distinctions to understand and act on the market. Innovations that are ambiguous to regulatory categories but not to market actors present a problem for regulators and an opportunity for innovative firms to evade or upend the existing order. We trace the history of one class of innovative financial derivatives — interest rate and foreign exchange swaps — to show how these instruments under- mined the separation of commercial and investment banking established by the Glass-Steagall Act of 1933. Swaps did not fit neatly into existing product categories — futures, securities, loans — and thus evaded regulatory scrutiny for decades. The market success of swaps put commercial and investment banks into direct competition, and in so doing undermined Glass-Steagall. Drawing on this case, we theorize some of the political and market conditions under which regulations may be especially vulnerable to disruption by ambiguous innovations.

Number of Pages in PDF File: 56

Keywords: Regulation, Innovation, Finance

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Date posted: January 5, 2014  

Suggested Citation

Funk, Russell J. and Hirschman, Daniel, Derivatives and Deregulation: Financial Innovation and the Demise of Glass-Steagall (January 4, 2014). Available at SSRN: http://ssrn.com/abstract=2374496 or http://dx.doi.org/10.2139/ssrn.2374496

Contact Information

Russell J. Funk
University of Michigan at Ann Arbor ( email )
500 South State Street
#3001
Ann Arbor, MI 48109
United States
HOME PAGE: http://www-personal.umich.edu/~funk/index.html
Daniel Hirschman (Contact Author)
University of Michigan at Ann Arbor ( email )
Ann Arbor, MI
United States
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