Private Enforcement of Systemic Risk Regulation

Abstract

The failure of the regulatory system is at least one of the contributing causes to the 2008 Financial Crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) will have a far-reaching impact on the financial services industry particularly in its attempt to regulate systemic risk. The Dodd-Frank Act, however, does not sufficiently address the problem of agency discretion generally, or the problem of an agency’s discretion to forebear, in particular. Under Dodd-Frank, the agencies retain considerable discretion and the effectiveness of the new regime depends on the optimal exercise of such discretion. This Article maintains that an effective regulatory regime should include some check on agency discretion and focuses specifically on the issue of agency enforcement. The article considers whether private monitoring could enhance the current public enforcement regime in preventing systemic crisis. The article proposes a hybrid public/private qui tam model of enforcement as a potentially valuable enhancement to systemic risk reform.

Keywords: banks, financial services, systemic risk, private enforcement, public enforcement, qui tam

JEL Classification: K23, K41, K42, K39