Recent debates over the future of financial markets has demanded innovative thinking about regulation, including words of caution offered by UNC faculty members Saule Omarova and Adam Feibelman in an article titled "Risks, Rules, and Institutions: A Process for Reforming Financial Regulation." Their work appears in the University of Memphis Law Review, volume 39, this fall.
"We recognized the need for a thoughtful approach to developing a proposal for regulatory reform," explains Omarova, assistant professor of law at the School of Law. "To be truly effective in preventing or minimizing future meltdowns, regulatory reform needs to be based on a firm and up-to-date understanding of where we stand in today's financial markets."
The majority of proposals for reform contain good ideas, says Omarova, but she and Feibelman are concerned that many of those recommendations seem to focus primarily on the issues of regulatory structure or respond to specific instances of market failure commonly associated with the recent financial crisis.
"Instead of rushing in to reshuffle regulatory agencies or enact new rules for specific types of financial products or institutions, we should put together a process whereby the entire financial services industry is being mapped out in terms of how that industry is structured and how it operates, especially as it emerges from the current crisis," says Omarova.
She suggests that it's important to first determine who the players are in the current economy, examine their business lines and risk profiles, and then determine what needs to be done.
Omarova acknowledges that an extensive review process could be both politically unpopular and time-consuming, but she believes it would yield a more efficient and adaptive regulatory system in the long run.
"Such a comprehensive review will allow us to reassess the current methods of regulating and minimizing specific risks posed by segments of today's complex financial markets," says Omarova. "Only after addressing these regulatory issues should we consider changes in the institutional structure of financial regulation - such as how many regulatory agencies should be involved and what their respective functions should be."
The article received advanced mention in the July 5 edition of a regular column in the Atlantic magazine authored by Richard A. Posner, a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a leading scholar in law and economics. Posner lauded Omarova and Feibelman's work, noting that "the article discusses a number of proposals for financial regulatory reform, but its main significance is its careful attention to the process of effective regulatory reform. The authors properly emphasize the importance of careful, step-by-step program design, based on a solid body of knowledge. The Administration could with profit heed their suggestions."
-July 29, 2009