Regulating Against Bubbles

In the Great Recession’s morality play, unscrupulous financiers on the inside of the mortgage industry exploited ordinary folk on the outside. Predatory lenders pushed unsuspecting homebuyers into teaser rate mortgages that seemed affordable but were in fact ticking time bombs. Wall Street’s financial alchemists then packaged these mortgages into impenetrably complex securities, which the credit rating agencies dutifully declared to be triple AAA gold. Everyone on the inside of this chain—the brokers, lenders, securitizers, and rating agencies—took their cut. But when the mortgage bomb finally exploded, the unsuspecting borrowers and investors on the ends of the chain were left in … Read more

Rules, Standards, and Complexity in the Cost Benefit Analysis of Capital Regulation

The following comes to us from Prasad Krishnamurthy, Assistant Professor of Law, U.C. Berkeley Law School.

The prudential regulation of banks by the federal banking agencies has traditionally been grounded in discretionary standards.  Recent calls for cost-benefit analysis of agency regulations have arisen, in part, from a deep skepticism toward broad grants of discretionary authority.  Under current law, the federal banking agencies are not required to give an explicit, efficiency-based justification for proposed regulations.

In my article “Rules, Standards, and Complexity in the Cost Benefit Analysis of Capital Regulation,”  which is forthcoming in Journal of Legal Studies for … Read more