Regulating Risk: Lessons Learned and Rational Reform

Abstract

The paper makes two general claims with regard to the financial crisis: 1) defective risk management practices account for the spate of firm failures; and 2) regulators with ample authority to constrain financial institutions from taking excessive risks did not do so. Aside from increased vigilance, a sensible response to these findings would include innovative regulatory strategies, ones that provide advance warnings of risk management catastrophes. The paper concludes with an outline of one such strategy.

Keywords: Financial crisis, regulation, OTS, SEC