Academic

Zaring on Failure to Resolve Financial Intermediaries

By Lawrence Solum

David T. Zaring (University of Pennsylvania - Legal Studies Department) has posted A Lack of Resolution (Emory Law Journal, Vol. 60, No. 1, 2010) on SSRN. Here is the abstract:

The failure to resolve ? that is, impose a quick death penalty on ? enormous financial intermediaries such as Lehman Brothers and AIG damaged the ability of the government to respond to the financial crisis. But expanding resolution authority to cover new systemically significant institutions ? which is one of the lynchpins of financial regulatory reform ? poses a problem of legitimacy with constitutional implications, as resolution authority is usually exercised with almost no predeprivation process and little postdeprivation compensation. At the same time, banking regulators have failed, every time they have been given more resolution authority, to exercise that authority when it is needed.

This Article reassesses resolution authority. It proposes (1) domestic solutions to protect against government overreach and (2) an international context to deal with the problem of underreach. First, it proposes that the government make an ex ante public list of potentially nationalizable institutions and, ex post, provide the owners of seized institutions a brief window in which to buy their institutions back from the regulators who took them. This proposal would add both a process check and a market check to this most severe form of decisionmaking. At the same time, this Article also proposes internationalizing the context of the decision to use resolution authority by including expert multinational committees of regulators in the decision. Because these regulators are somewhat insulated from ordinary domestic politics, this twofold approach is more likely to encourage the appropriate resolution of the largest institutions than any solely domestic approach.

Full post as published by Legal Theory Blog on November 11, 2010 (boomark / email).