The Systemic Risk Paradox: Banks and Clearinghouses Under Regulation

Felix B. Chang

University of Cincinnati College of Law

April 4, 2014

Columbia Business Law Review, Forthcoming
U of Cincinnati Public Law Research Paper No. 14-06

Consolidation in the financial industry threatens competition and increases systemic risk. Recently, banks have seen both high-profile mergers and spectacular failures, prompting a flurry of regulatory responses. Yet consolidation has not been as closely scrutinized for clearinghouses, which facilitate trading in securities and derivatives products. These nonbank intermediaries can be thought of as middlemen who collect deposits to ensure that each buyer and seller has the wherewithal to uphold its end of the deal. Clearinghouses mitigate the credit risks that buyers and sellers would face if they dealt directly with each other.

Yet here lies the dilemma: large clearinghouses reduce credit risk, but they heighten systemic risk since the collapse of one such entity threatens the entire financial system. While the systemic risks posed by large banks have been tackled by regulators, the systemic risks of these nonbank intermediaries have received less attention. In fact, clearinghouses have been cloaked with a regulatory mantle which encourages unchecked growth.

This Article examines the paradoxical treatment of regulators toward the systemic risks of clearinghouses and banks. It explores two fundamental questions: Why does the paradox exist, and who benefits from it? Borrowing from antitrust, this Article offers a framework for ensuring that the entities which control a large clearinghouse (the big banks) do not abuse its market dominance.

Number of Pages in PDF File: 55

Keywords: banks, clearinghouses, financial regulation, risk, securities, derivatives

JEL Classification: A1, K0, K2, K23

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Date posted: April 8, 2014  

Suggested Citation

Chang, Felix B., The Systemic Risk Paradox: Banks and Clearinghouses Under Regulation (April 4, 2014). Columbia Business Law Review, Forthcoming; U of Cincinnati Public Law Research Paper No. 14-06. Available at SSRN: https://ssrn.com/abstract=2421325

Contact Information

Felix B. Chang (Contact Author)
University of Cincinnati College of Law ( email )
P.O. Box 210040
Cincinnati, OH 45221-0040
United States
HOME PAGE: http://www.law.uc.edu/faculty-staff/felix-b-chang

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