Congruent Financial Regulation

54 Pages Posted: 6 Apr 2021

See all articles by Andrew Metrick

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Daniel K. Tarullo

Harvard Law School

Date Written: April 1, 2021

Abstract

We propose a congruence principle for financial regulation. Application of this principle would enable regulators to use economically similar instruments across multiple domains to manage systemic risk. We present case studies of market malfunctions that occurred when congruence was ignored: nonprime mortgage finance (in 2008 and 2020) and United States Treasury securities (in 2020). In these cases, risk built up in non-bank financial institutions due in part to regulatory arbitrage. Under a congruence principle, regulators could mitigate this risk using a coordinated combination of capital requirements, minimum haircuts on repo transactions, and margining rules on futures exchanges and central clearing parties.

Keywords: financial regulation, systemic risk. shadow banking, repo

JEL Classification: G01, G18, G28

Suggested Citation

Metrick, Andrew and Tarullo, Daniel K., Congruent Financial Regulation (April 1, 2021). Available at SSRN: https://ssrn.com/abstract=3817621 or http://dx.doi.org/10.2139/ssrn.3817621

Andrew Metrick (Contact Author)

Yale School of Management ( email )

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(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Daniel K. Tarullo

Harvard Law School ( email )

Harvard Law School
Areeda 335
Cambridge, MA 02138
United States
617-998-1702 (Phone)

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