UNDERSTANDING FINANCIAL REGULATION

This Article offers an account of financial regulation that is focused on the types of regulatory strategies that financial regulators employ. Noting the lack of prior academic work in this area, the Article presents a taxonomy of strategies, consisting of rulemaking, supervision, certification, and enforcement, and argues that regulators actively choose between versions of strategies that require their direct input and immediate expenditure of regulatory resources (public regulatory strategies) and strategies that delegate the burden of regulation onto private actors (private regulatory strategies). This choice affects the nature and effectiveness of financial regulation, both in terms of the degree to which financial regulation relies on self-regulation, gatekeepers, private rights of action, and other private strategies and the manner in which the interests of private parties involved in private strategies are aligned with those of the public. As the primary difference between public and private regulatory strategies is the immediate cost to the regulator, this Article further argues that the availability of resources is the primary determinant of the types of regulatory strategies selected by financial regulators. This Article then explores two implications of the role of resource constraints on financial regulation. The first is an explanation for the oft- noted “sine curve of regulatory activity,” a cyclical pattern of lighter to heavier regulatory activity before and after a financial crisis or scandal. In the aftermath of any such financial crisis or scandal, regulators face intense pressure to demonstrate they are in control of the financial markets and, therefore, rely more on public strategies—strategies that give the regulator greater visibility and command. Eventually, however, resource constraints force regulators to seek more cost-effective  regulatory strategies, driving them to rely more on private strategies. The second is what happens when regulators cannot easily access private strategies, such as in the case of systemic risk regulation. Under resource constraints, regulators resort to “blunter” public strategies that are less costly but are not as fine-tuned, such as proposals to create narrow banks or abandon traditional financial regulatory strategies in favor of extraregulatory solutions, such as bank fees and size limitations on financial institutions.