Todd Zywicki on Financial Regulation and Arbitrary Risk Thresholds
A white paper by ICLE Nonresident Scholar Todd J. Zywicki on how arbitrary regulatory thresholds distort financial markets was cited in a piece on financial stability and banking regulation. The paper examines how size-based triggers under Dodd-Frank can encourage regulatory arbitrage, consolidation, and higher costs for consumers. Read the full piece here.
Threshold-based financial regulation can distort competition, encourage regulatory arbitrage, harm consumers, and result in strategic decisions that undermine policy objectives, according to a white paper issued by the International Center for Law & Economics (ICLE). The white paper, titled “Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets”, is authored by ICLE Nonresident Scholar Todd J. Zywicki.
No Clear Rationale for Thresholds. Asset-size triggers have proliferated as seemingly simple, objective tools for allocating supervisory resources, mitigating systemic risk, and advancing consumer protection. In practice, however, Zywicki noted that these bright-line cutoffs have often produced the opposite result. Rather than aligning regulatory review with actual risk or consumer harm, rigid thresholds can lead to abrupt compliance cliffs that distort competition, encourage wasteful regulatory arbitrage, accelerate consolidation, and invite political rent-seeking.
“Thresholds can be useful when they are tied to measurable risks and subject to regular review,” Zywicki added. “But when they become a shortcut for analysis, they invite rent-seeking, arbitrage, and market distortions. Financial regulation needs better tools than arbitrary numerical lines, the author stated.