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Reverse Regulatory Arbitrage: An Auction Approach to Regulatory Assignments

63 Pages Posted: 13 Aug 2012  

M. Todd Henderson

University of Chicago - Law School

Frederick Tung

Boston University School of Law

Date Written: August 2, 2012

Abstract

In the years before the Financial Crisis, banks got to pick their regulators, engaging in a form of regulatory arbitrage that we now know was a race to the bottom. We propose to turn the tables on the banks by allowing regulators, specifically, bank examiners, to choose the banks they regulate. We call this “reverse regulatory arbitrage,” and we think it can help improve regulatory outcomes. Building on our prior work that proposes to pay bank examiners for performance — by giving them financial incentives to avoid bank failures — we argue that bank supervisory assignments should be set through an auction among examiners. Examiner bidding would generate information about examiners’ skills, experience and preferences, as well as information about each bank. Provided examiners bear the upside and downside of their regulatory behavior, a bidding system for regulatory assignments could improve the fit between examiners and the banks they supervise, thereby enhancing regulatory efficiency.

Suggested Citation

Henderson, M. Todd and Tung, Frederick, Reverse Regulatory Arbitrage: An Auction Approach to Regulatory Assignments (August 2, 2012). University of Chicago Institute for Law & Economics Olin Research Paper No. 610; U of Chicago, Public Law Working Paper No. 397; Boston Univ. School of Law, Law and Economics Research Paper No. 12-49; Boston Univ. School of Law, Public Law Research Paper No. 12-49. Available at SSRN: https://ssrn.com/abstract=2128823 or http://dx.doi.org/10.2139/ssrn.2128823

M. Todd Henderson (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)

Frederick Tung

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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