March 15, 2011
What Is This Financial Regulation, Anyway?
Posted by David Zaring

I've been thinking a bit about reductionist encapsulations of financial regulation - it's something I've always approached from an administrative law and international perspective, from the view of the government.  But what is it that banking lawyers who do not work for the government do, anyway?

Here's one way to think about it.  As the financial crisis made clear, what banking lawyers do is at bottom directed at proving to regulators that their institutions are safe and sound.  Part of this involves handling examinations, the basically annual visits by the overseers/FDIC, who go through the books, scrutinize the capital on hand, check the internal controls, and so on.  That's a lawyer-accountant-bureaucrat job.  There's also a due diligence consumer protection part of the job - that's the job that may change quite a bit with the establishment of a new consumer protection regulator here.

But Rodge Cohen or Randall Guynn wouldn't get out of bed to talk to bank examiners or to deal with the Community Reinvestment Act reporting requirements, it seems to me.  So what is it that the fancy financial lawyers do?    There's also an element of financial regulation that involves bet the company trasnactions, and core strategic decisions that must be made in the context of a business that was moving from heavily to lightly regulated, and now may be moving back towards heavily.  Questions of affiliate businesses bank holding companies can own, the creation of proprietary trading and other more universal-banking like outfits within the bank, the offering of investment advice to clients - all of this gets to critical issues of what the financial intermediary is, and none of it can be done without regulatory approval.  And regulatory approval, once agian, requires a case that the bank's answer to the core strategy question, "what new thing are we going to do?", will either improve or not hurt the safety and soundness of the bank.  So for that, you might hire a very fancy Wall Street lawyer, preferably with Washington colleagues.

If it all goes pear-shaped, of course, you're going to have to deal with bailouts and flash sales - but that too goes to safety and soundness.

Finally, there's an element of princely bankers talking to princely regulators - witness Tim Geithner's financial crisis phone logs.  Some, but not many, banking lawyers probably see their job as being a part of these high level conversations, though there's nothing inherently legal about them.

So that's one way of thinking about what domestic financial regulation is all about anyway - your potted summary, suitable for one page of the outline.  What did I miss?  Let me know in the comments.

Administrative Law, Finance, Financial Crisis | Bookmark

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