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American Economic Review: Vol. 101 No. 3 (May 2011)

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Financial Regulatory Reform: Challenges Ahead

Article Citation

Kroszner, Randall S., and Philip E. Strahan. 2011. "Financial Regulatory Reform: Challenges Ahead." American Economic Review, 101(3): 242-46.

DOI: 10.1257/aer.101.3.242

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.

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Authors

Kroszner, Randall S. (U Chicago)
Strahan, Philip E. (Boston College)

JEL Classifications

G18: General Financial Markets: Government Policy and Regulation
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation
L51: Economics of Regulation


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