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Regulating in the Dark

48 Pages Posted: 19 Dec 2011 Last revised: 2 Apr 2012

Roberta Romano

Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: March 30, 2012

Abstract

Foundational financial legislation is typically adopted in the midst or aftermath of financial crises, when an informed understanding of the causes of the crisis is not yet available. Moreover, financial institutions operate in a dynamic environment of considerable uncertainty, such that legislation enacted even under the best of circumstances can have perverse unintended consequences, and regulatory requirements correct for an initial set of conditions can become inappropriate as economic and technological circumstances change. Furthermore, the stickiness of the status quo in the U.S. political system renders it difficult to revise legislation, even though there may be a consensus to do so. This essay contends that the best means of responding to this dismal state of affairs is to include, as a matter of course, in crisis-driven financial legislation and its implementing regulation two key procedural mechanisms: (1) a requirement of automatic subsequent review and reconsideration of the legislative and regulatory decisions at some future point in time; and (2) regulatory exemptive or waiver powers, that encourage, where feasible, small scale experimentation, as well as flexibility in implementation. Both procedural devices will better inform and calibrate the regulatory apparatus, and could thereby mitigate, at least on the margin, the unintended errors which will invariably accompany financial legislation and rulemaking originating in a crisis. Given the centrality of financial institutions and markets to economic growth and societal well-being, it is exceedingly important for legislators acting in a financial crisis with the best of intentions, to not make matters worse.

Keywords: financial regulation, sunset, experimentation, Sarbanes-Oxley, Dodd-Frank, Basel Accord

JEL Classification: K20, K22, K23, G28, G38

Suggested Citation

Romano, Roberta, Regulating in the Dark (March 30, 2012). Yale Law & Economics Research Paper No. 442. Available at SSRN: https://ssrn.com/abstract=1974148 or http://dx.doi.org/10.2139/ssrn.1974148

Roberta Romano (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4965 (Phone)
203-432-4871 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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