Wall Street as Community of Fate: Toward Financial Industry Self-Regulation
82 Pages Posted: 26 Jan 2011
Date Written: January 25, 2011
In the wake of the worst financial crisis since the Great Depression, policy-makers around the world are searching for ways to manage systemic risk in the global financial market. This article argues that one key, and currently entirely overlooked, potential mechanism for controlling and minimizing systemic financial risk is industry-wide self-regulation. However, it advocates a fundamentally new self-regulatory regime in the financial sector, which would focus explicitly on the issue of systemic risk prevention and impose responsibility to protect the broader public from financial crises directly on the financial services industry. This article further argues that the financial services industry currently lacks meaningful incentives to develop this new type of more public-minded and socially responsible self-regulation. It examines the experience with self-regulation in other sectors – in particular, the nuclear power and chemical manufacturing industries – and analyzes how the key factors that made the emergence of such self-regulatory regimes possible in those industries might play out in the context of the financial sector. Finally, this article argues that it may be possible to alter the existing incentive structure through thoughtful regulatory design and proposes some steps that may be taken in that direction.
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