Bankers, Bureaucrats, and Guardians: Toward Tripartism in Financial Services Regulation
Saule T. Omarova
Cornell Law School
September 8, 2011
Journal of Corporation Law, Vol. 37, No. 3, 2012
UNC Legal Studies Research Paper No. 1924546
The recent financial crisis highlighted a fundamental but little-noticed paradox. The rising economic cost of financial market failure is disproportionately borne by the taxpaying general public. Yet, the public lacks an ability to participate meaningfully in the process of regulating increasingly complex financial markets. The crisis exposed pervasive market misconduct, regulatory incompetence, and conflict of interest in the U.S. financial sector. Yet, the post-crisis reform legislation continues to view financial services regulation as a process involving only two familiar principals: the industry and the regulators. Despite their dismal track record as guardians of public interest, bankers and bureaucrats effectively remain in charge of protecting the public from the next financial meltdown.
This Article challenges that concept by re-envisioning systemic risk regulation as a tripartite process. It proposes the creation of a Public Interest Council (the “Council”), an independent government instrumentality established and appointed by Congress and located outside of the executive branch. Its charge would be to participate in the regulatory process as the designated representative of the public interest in preserving long-term financial stability and minimizing systemic risk. The Council would comprise individuals who are (1) competent in issues of financial regulation, and (2) independent from both the industry and regulators. Although the Council would not have any legislative or executive powers, it would have broad statutory authority to collect information from government agencies and private market participants; to investigate specific issues and trends in financial markets; to publicize its findings; and to advise Congress and regulators to take action with respect to issues of public concern. In effect, the Council’s main function would be to counteract regulatory capture and to diffuse the financial industry’s power to control the regulatory agenda by putting both bankers and bureaucrats under constant and intense public scrutiny. Despite potential implementation challenges, this proposal takes an important step toward a more effective and public-minded model of systemic risk regulation.
Number of Pages in PDF File: 54
Keywords: financial regulation, regulatory reform, tripartism, financial crisis, public interest, regulatory capture, systemic risk
Date posted: September 10, 2011 ; Last revised: April 12, 2012