Sunsetting as an Adaptive Strategy
23 Pages Posted: 25 Aug 2020 Last revised: 3 Mar 2021
Date Written: October 21, 2020
Major financial legislation is invariably enacted in the wake of a financial crisis. Yet legislating following a crisis is hazardous, because information is scarce regarding causes of the crisis, let alone what would be an appropriate response. Compounding the lack of information, crisis-driven legislation is sticky, but financial markets are dynamically innovative, which can undermine the efficacy of regulation. As a result, it is entirely foreseeable that such legislation will contain at least some provisions that are inapt or inadequate or, more often, have consequences that are not well understood or even knowable. This paper advocates the use of sunsetting as a mechanism for mitigating the potentially adverse consequences of crisis-driven financial legislation. With sunsetting, after a fixed time span, legislation and its implementing regulation must be reenacted to remain in force. Such a requirement would compel a timely revisiting of crisis-driven legislation when far more information is available than at the time of enactment. This approach has parallels in evolutionary biology, in which a central issue is the ability to adapt to changing environments. Sunsetting does not mean simply discarding (or reenacting) existing regulations, but revisiting them and improving them, much as mutation and recombination do in the evolutionary process. In evolutionary modification, mutational changes would leave most of the genome alone, and selectively replace some; recombination would use existing segments, but recombine them in ways that produce higher fitness. Similarly, in modifying existing legislation, one can keep some provisions, modify others, and “recombine” by adding provisions from other regulators. The latter is more akin to the process of horizontal transfer in evolution, as for example through the (possibly cross-species) exchange by bacteria of extrachromosomal DNA that might confer antibiotic resistance.
Keywords: financial crises, banking regulation, evolutionary biology, sunsetting
JEL Classification: K22, K23, G01, G28
Suggested Citation: Suggested Citation