Financial Regulatory Reform: Challenges Ahead
Randall S. Kroszner, Philip E. Strahan
American Economic Review · 2011 · Volume 101 · Issue 3
Abstract
Today's financial system is dominated by markets with institutions connected by short-term financing, securitization, derivatives, and other means. Yet regulations have focused on depositories, leaving regulators unprepared for the 2008 crisis. We suggest two key principles for regulatory reform. First, some changes in the financial system came as institutions lowered the burden of regulations through "regulatory arbitrage." Reform needs to avoid driving businesses "into the shadows," where risks may accumulate and sow seeds of future crises. Second, reform ought to improve transparency to reduce uncertainty and inter-linkages between players. We evaluate some of Dodd-Frank Act in light of these principles.
Keywords
General Financial Markets: Government Policy and Regulation, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages, Financial Institutions and Services: Government Policy and Regulation, Economics of Regulation
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