Capture Nuances in the Contest for Financial Regulation

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Wake Forest Law Review, Vol: 47, Page: 537-568

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Baxter, Lawrence G.
Interest groups; Deregulation; Public finance; Financial institutions; Board of Governors of the Federal Reserve System (U.S.); financial regulation, regulatory capture, Federal Reserve Bank, The Fed, financial industry, financial policy
article description
Applying capture analysis in the hotly contested arena of financial regulation is difficult. Numerous regulators with widely differing missions and widely diverse stakeholders are involved. Regulators operate under widely differing authorizing legislation. They even function at different levels of government. Agencies are often at odds with each other when it comes to determining optimal public policy. Unlike policy disputes in many other areas of regulation, which can be settled by reference to scientific data, public policy in financial regulation rests profoundly on essentially contested economic ideologies. This makes financial policy doubly difficult: one the one hand, it requires deep expertise—and therefore agency, as opposed to legislative—determination; on the other, this expertise must be informed by prevailing perceptions of which economic principles are most plausible, even though these principles are seldom actually verifiable. It is also often overlooked that financial institutions—banks in particular—perform quasigovernmental roles, such that close cooperation between the regulators and the regulated is not only inevitable but also indispensable. “Capture” is therefore often just a confusing term of regulatory analysis because it rests on shallow perceptions of the regulatory process. Stakeholders and even the agencies themselves inevitably “contest” for the policies they deem most desirable. What is important is to prevent, as far as possible, undue influence by certain stakeholders at the expense of others, and the adequate representation of alternative views in the combative arena of policy competition. The principles of democratic participation remain the important guiding light for financial regulatory reform. This article reviews the fragmented nature of the regulatory process in finance, the close relationship between banks and government, and the emerging forces that might help to make the policy contest more balanced.