Reframing systemic risk regulation as a political dilemma inspired me to take a closer look at the possibility of introducing some form of tripartism in this area. The concept of tripartism as an element of regulatory design comes from Ayres and Braithwaite’s seminal work on responsive regulation. To put it simply, Ayres and Braithwaite argued that empowering public interest groups (PIGs) provided a potential cure for regulatory capture. This notion, however, is of limited value in the context of financial systemic risk regulation. The general public lacks specialized expertise necessary to participate in complex and often technical decision-making in the systemic risk regulation area. Even organized PIGs in the financial sector tend to focus on consumer protection rather than systemic risk issues. Therefore, this traditional concept of tripartism is not likely to work in financial sector regulation.
In a recent paper, “Bankers, Bureaucrats, and Guardians: Toward Tripartism in Financial Services Regulation,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924546, I attempt to outline, in very broad strokes, a modified tripartite system that might work in this area. In the absence of “organic” systemic risk PIGs, I propose the statutory creation of a functional equivalent to such a PIG: the Public Interest Council. The Council would have a special status as an independent government instrumentality created by Congress and located outside of the legislative and executive branches. Its explicit charge would be to protect the interests of the U.S. taxpayers in preserving financial stability and minimizing potential systemic risk in the financial markets. It would comprise individuals who are independent from both the industry and regulators and who are competent in issues of financial regulation – primarily academic experts, but also certain public figures (not holding any official post) and representatives of consumer and other public interest groups. Although the Council would not have any legislative or executive powers, it would have broad statutory authority to collect any information it deems necessary from any government agency or private market participant, and to conduct targeted investigations and reviews of specific issues and trends in financial markets. The Council’s statutory powers would also include the right to request regulatory agencies to report on their activities or to take action in identified areas, to participate in regulatory rule-making, and to petition Congress to take action with respect to specific issues of public concern.
In effect, the Council’s main function would be to impose structural checks on regulatory capture and to diffuse the industry’s power to control the regulatory agenda by putting both financial regulators and financial institutions under constant and intense public scrutiny. In that sense, the proposed Council may be viewed as a permanent equivalent of a congressional advisory commission whose task is to shine the disinfecting sunlight on the workings of the financial services industry and its official overseers before the disaster strikes.
This proposal is likely to raise some eyebrows. In the article, I discuss some of the main potential criticisms and challenged. More than anything, this is truly a thought experiment. But I do believe it raises a critically important set of issues that need to be addressed more explicitly.
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