Systematic Regulation of Systemic Risk

53 Pages Posted: 17 Aug 2018 Last revised: 11 Apr 2019

Date Written: September 12, 2018


A decade after the financial crisis, regulators worry that the regulation enacted to help stabilize the financial system may be insufficient to prevent another crisis. Examining that regulation with the benefit of hindsight, this Article finds that much has been accomplished but much remains to be done. Most of the existing regulation is ad hoc, providing “tools” rather than a coherent framework. It also is unduly entity-based, largely ignoring markets and other critical elements of the financial system. Furthermore, some of that entity-based regulation is punitive and misguided, responding to the human intuition to assign blame for harm. Financial stability requires a more systematic regulatory framework. The Article builds that framework on normative foundations, recognizing that the fundamental reason to regulate finance should be to correct market failures. Regulation intended to stabilize the financial system should focus on correcting market failures that could trigger and transmit systemic risk—the risk that financial instability will significantly impair the real economy. The Article attempts to identify and better understand those triggers and transmission mechanisms, and their underlying market failures. Finally, it analyzes how regulation could help to correct those market failures, revealing important new insights into regulatory design.

Suggested Citation

Schwarcz, Steven L., Systematic Regulation of Systemic Risk (September 12, 2018). Wisconsin Law Review, Forthcoming, Duke Law School Public Law & Legal Theory Series No. 2018-60, Available at SSRN: or

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

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