Financial Stability Oversight Council Research Articles

Oversight of the Financial Stability Oversight Council: Due Process and Transparency in Non-Bank SIFI Designations

This is testimony given by the author before the House Committee on Financial Services on 19 November 2015 in connection with MetLife v. Financial Stability Oversight Council (FSOC). The author argues that the FSOC's SIFI-designation process represents a textbook case of a familiar finance-regulatory strategy, long upheld by our courts, aimed at dutifully discharging necessary Congressional delegation on the one hand while comporting with separation of powers and due process values on the other hand. He also argues that FSOC represents a quintessentially American, pragmatic solution to the long-festering 'silo' problem in American financial regulation, and that its designations of systemically important financial institutions (SIFIs), decided as they are by all of the nation's principal financial regulators, are entitled to great deference on grounds of (a) well-settled doctrine under Chevron, (b) the highly technical character of the problem with which FSOC deals, and (c) the exceptionally high stakes of failure adequately to monitor large, complex financial institutions.

Financial Stability Oversight Council Reform or Abolition?

FSOC Reform or Abolition: The Financial Stability Oversight Council was created by the 2010 Dodd-Frank law to focus a single agency of government on the issue of predicting the sources of financial instability, but it has become an agent for destroying investors value in the financial markets by virtue of its power to designate non-banks as being systemically significant. The existence of the FSOC has arguably not made markets any safer and, along with the other provisions of Dodd-Frank, the FSOC has in fact contributed to a reduction in credit creation and liquidity. The FSOC has led to several large non-bank firms (Metlife & GE) exiting important markets such as home mortgages and consumer credit. There is no practical reason for the FSOC to exist apart from the fact that residents of Washington still seem to believe that they can legislate economic outcomes. This paper argues that, in view of these shortcomings, eliminating the FSOC should be the first priority for the next administration of either party.

Cost-Benefit Analysis and the Structure of the Administrative State: The Case of Financial Services Regulation

The viability and desirability of conducting cost-benefit analysis of financial regulation is a subject of intense academic debate. Opponents claim that such analysis is feasible for environmental regulation but not for financial regulation because of the difference in the benefits that require monetization in the respective areas. This Article argues that the recent debate misses an important part of the problem. In large part, cost-benefit analysis of financial regulation cannot currently be performed successfully because of institutional shortcomings, not analytical difficulties. Compared to Executive Branch agencies, independent agencies, like the major financial regulatory agencies, lack the capacity to do cost-benefit analyses of acceptable quality. Fortunately, there are good Executive Branch models that could be exported to the financial regulatory agencies. In particular, the Financial Stability Oversight Council could implement a robust coordinating role diffusing macroeconomic expertise, learning from the experience of the Interagency Working Group set up to estimate the damage of one ton of carbon dioxide emissions. Moreover, the President could extend to independent agencies his Executive Order vesting in the Office of Information and Regulatory Affairs the responsibility to review significant federal regulations. Though no President has yet taken this step, in part because of fears of a congressional backlash, the time might now be ripe to do so. And, the financial regulatory agencies could learn from the experience of the Environmental Protection Agency in building significant economic expertise to aid the preparation of cost-benefit analyses.The Article also considers the role of judicial review. It takes issue with the influential argument that OIRA review can serve as an alternative to judicial review, showing that such an outcome would be inconsistent with settled principles of administrative law. But OIRA review can lead to more deferential judicial review, by serving as a signal that reviewing courts are likely to find reassuring.

Designating Bank SIFIs: An Arbitrary Threshold for Risk

In response to the recent severe financial crisis and the worst recession since the Great Depression, the U.S. Congress enacted and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) in July 2010. An important objective of DFA is to mitigate the threat to financial stability posed by systemically important financial institutions, or SIFIs. Should any of these institutions fail, the entire financial industry would be adversely affected and most likely the broader economy as well. The Financial Stability Oversight Council (FSOC) was established by DFA to identify any and all SIFIs, which are then subjected to enhanced prudential supervision by the Federal Reserve Board. Section 165 of DFA, however, requires that bank holding companies (BHCs) with $50 billion or more in consolidated assets must be designated as SIFIs.

Amicus Brief of Scholars of Insurance Regulation in MetLife v. FSOC

This Amicus Brief of Scholars of Insurance Regulation involves MetLife's challenge to the Financial Stability Oversight Council’s (FSOC) determination that material financial distress at the company could pose a threat to U.S. financial stability. The brief focuses on one central element of MetLife’s challenge -- that FSOC failed to adequately consider the strength of the state insurance regulatory system in designating MetLife as a systemically significant nonbank financial company. The amicus brief argues that FSOC’s designation of MetLife fairly accounts for state insurance regulation’s focus on protecting policyholders rather than mitigating systemic risk. It argues that advancing these two regulatory goals often requires very different types of prudential safeguards and supervisory scrutiny. Many of the central features of U.S. state insurance regulation, the brief suggests, are inadequate in their capacity to prevent, anticipate, or respond to systemic risks. This problem is structural and cannot be remedied by state reforms, as states lack the inherent jurisdiction and ability to properly monitor and regulate systemic financial risk.

US SEC approves sweeping amendments to rules governing money market funds

Purpose – To explain the background and details and to discuss the implications of the USA Securities and Exchange Commission’s (SEC’s) July 23, 2014 amendments to Rule 2a-7 and other rules that govern money market funds under the Investment Company Act of 1940. Design/methodology/approach – Explains the background, including problems during the financial crisis, the USA Treasury’s temporary guarantee program in 2008, earlier SEC proposals, and the USA Financial Stability Oversight Council’s recommendations. Details the amendments to Rule 2a-7, including the authorization to impose liquidity fees and redemption gates, the floating net asset value (NAV) requirement, the impact of the amendments on unregistered money funds operating under Rule 12d1-1, guidance on fund valuation methods, disclosure requirements, requirements for money fund portfolios to be diversified as to issuers of securities and guarantors, stress testing requirements, and compliance dates. Findings – The Amendments set forth sweeping changes to money fund regulation and will have a profound effect on the money fund industry. Although the most significant provisions of the Amendments – the floating NAV requirement and the imposition of liquidity fees and redemption gates – will not go into effect for two years, the changes to the industry will be apparent almost immediately. Practical implications – Money fund managers and boards of directors should begin assessing the potential impact of the Amendments and develop a schedule to come into compliance. Originality/value – Practical guidance from experienced financial services lawyers.

The Dodd-Frank Act: Key Features, Implementation Progress, and Financial System Impact

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010 provides for a wide variety of new regulatory and supervisory initiatives with the goal to promote a safer and sounder banking system. Our paper puts Dodd-Frank into a historical perspective, identifies its key features, discusses the implementation progress, and assesses whether the law will accomplish its objectives. We conclude that the approach in the law to financial regulatory reform is best described as a Band-Aid approach to financial regulation. A better approach in our view is one that strengthens market discipline on bank risk-taking and enhances competition so as to reduce the regulatory burden and enhance the efficiency and stability of the financial system. Dodd-Frank pays lip service to this objective with the creation of an Orderly Liquidation Authority and the Financial Stability Oversight Council, with the effectiveness of both these new bodies being very much in doubt.

The Systematic Risk of Private Funds After the Dodd-Frank Act

The Financial Stability Oversight Council (FSOC) was created under the Dodd-Frank Act with the primary mandate of guarding against systemic risk and correcting perceived regulatory weaknesses that may have contributed to the financial crisis of 2008-2009. The Securities and Exchange Commission (SEC) collects data pertaining to private fund advisers in order to facilitate FSOC’s assessment of non-bank financial institutions’ potential systemic risks. Evidence that the SEC’s data collection encounters accuracy and consistency problems might hamper FSOC’s ability to evaluate the systemic risk of private fund advisers. The author shows that while the SEC’s data plays a crucial role in all stages of FSOC’s systemic risk assessment of private fund advisers, FSOC relies most heavily on some of the most problematic disclosure items collected by the SEC.

Money Market Fund Reform

For more than four years, our law firm represented a large asset manager and adviser to money market mutual funds in the debate over proposals to impose new regulations on these funds. These proposals were developed in response to the heavy redemptions from prime money market funds during 2008 in the depths of the financial crisis. In this Article we share our observations about the dynamics of the debate and the forces that led to the Securities and Exchange Commission’s (“SEC”) action in 2014 to adopt amendments to its money market fund rules, which will be fully implemented on October 14, 2016. We begin with an overview of the SEC’s action, followed by a review of money market fund regulation, a recounting of relevant events in the 2007–2009 financial crisis, a discussion of the SEC’s initial efforts on money market fund reform, and a discussion of the impact of the new Financial Stability Oversight Council (“FSOC”) on the debate. We end with our comments regarding the SEC’s new money market fund rules and some concluding observations. While the purpose of this Article is to provide a narrative of events that led to the SEC’s ultimate decision on new money market funds rules, we observe that the FSOC’s intervention into the SEC’s rulemaking, accompanied by threats of further FSOC action against SEC-regulated entities if the SEC failed to act on new rules, raises serious concerns and questions yet to be addressed about the role of the FSOC and the independence of the SEC as the primary capital markets regulator. The FSOC’s actions, if left unchecked, could portend a shift of power toward bank-like regulation of the capital markets.

Putting the 'Financial Stability' in Financial Stability Oversight Council

For all the ink that has been spilled on the topic of financial regulation since the financial crisis of 2007-2008, there has been little examination of the competing normative goals of financial regulation. Should the financial system be treated as an end in itself, such that the efficiency of that system is the primary goal? Or should financial regulation instead treat the financial system as a means to the end of broader economic growth? This Article argues for the latter approach, and stakes out the controversial normative position that financial stability, rather than efficiency, should be the paramount focus of financial regulation. Having fixed upon this normative foundation, this Article is in a position to evaluate Dodd-Frank’s creation of the Financial Stability Oversight Council (“FSOC”), a body intended to bring the United States’ financial regulators together for the purpose of identifying and responding to threats to financial stability. This Article argues that there are significant flaws in the FSOC’s structure and mandate that will limit its ability to discharge this vital task. Whilst the FSOC is currently the subject of legislative reform proposals, these proposals seek to hobble the FSOC’s powers – this Article argues that reform should instead swing in the other direction. What is needed is an effective and independent regulator with the resources and mandate to take a proactive, long-term and creative approach to the promotion of financial stability. This Article therefore explores potential reforms to the United States financial regulatory architecture – ranging from the incremental to the more drastic – designed to improve commitment to financial stability.

The Assessment of Private Fundss Systemic Risk after the Dodd-Frank Act

The Financial Stability Oversight Council (FSOC) was created under the Dodd-Frank Act with the primary mandate of guarding against systemic risk and correcting perceived regulatory weaknesses that may have contributed to the financial crisis of 2008-09. The SEC collects data pertaining to private fund advisers in order to facilitate the FSOC’s assessment of non-bank financial institutions’ potential systemic risks. Evidence that the SEC’s data collection encounters accuracy and consistency problems might hamper the FSOC’s ability to evaluate the systemic risk of private funds. The author shows that while the SEC’s data plays a crucial role in all stages of FSOC’s systemic risk assessment of private funds, the FSOC relies most heavily on some of the most problematic disclosure items collected by the SEC.

Financial Stability Rearticulated: The Consumer Financial Protection Bureau and the Shift in the U.S. Regulatory Stance after the Crisis

The recent financial crisis was a powerful reminder that the inherent instability of the monetary-financial system is likely to entail serious consequences for the real economy. In the U.S., the monumental Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) has provided legislation that aims to institutionalise several aspects a new thinking on financial stability. In addition to the interagency Financial Stability Oversight Council (“FSOC”), the creation of the The Consumer Financial Protection Bureau (“CFPB”) marks an important departure from the U.S. regulatory tradition of de-centralized agencies whereby the institutional locus of financial oversight depended on the precise nature of the legal structure of and business activities pursued by individual financial intermediaries. In its mandate and institutional structure, the CFPB unifies both “micro-prudential” and “macroprudential” principles of financial regulation to enhance overall financial stability. From an historical perspective, the creation of the CFPB does not change the regulatory landscape to the same extent as did the creation of the Federal Reserve after the Panic of 1907 or the creation of the FDIC after the 1933 Banking Crisis. At the same time, however, the CFPB represents an important historical shift in the policy focus of U.S. financial regulation away from bank stability bank to a broad notion of financial stability that recognises the increased financialisation of households’ welfare.

The Direct Regulation of Potential Systemic Risk of Hedge Funds in the U.S. before and after the Dodd-Frank Act

This article compares the direct regulation of hedge funds in the U.S. prior to the Dodd-Frank Act with the direct regulatory measures to address potential systemic risks of hedge funds ensued in its aftermaths. The direct regulation involves regulatory measures focusing immediately on the regulation of the target industry. In contrast, the imperatives or commands of indirect regulation is mediated by or transmitted through an intermediary to the (primarily intended) regulated entity or activity, which is ultimately the target. To address the potential contribution of hedge funds to financial instability, the Dodd-Frank Act uses a mix of direct and indirect regulatory measures. This article focuses solely on the direct regulatory measures.The first part of the article briefly sketches the regulatory environment of hedge funds in the U.S. prior to the enactment of the Dodd-Frank Act. The second part analyzes the relevant provisions of the Dodd-Frank Act intended to address the potential contribution of hedge funds to financial instability with direct regulatory measures. On the one hand, these measures mainly address the information problems in the hedge fund industry through the imposition of the registration and disclosure requirments on hedge funds and collection of systemic risk data. On the other hand, as an additional direct regulatory measure, the Dodd-Frank Act requires the Federal Reserve (Fed) to impose prudential regulation for hedge funds contingent upon their designation as Systemically Important Non-bank Financial Companies (SINBFCs) by the Financial Stability Oversight Council (FSOC). This article concludes that in the absence of the indirect regulatory measures focusing on the banking entities placing restrictions on their relationships with private funds (embodied in the Volcker Rule), the direct regulation of hedge funds is unlikely to mitigate the potential systemic risk of hedge funds.

Dodd-Frank Says 'Too Big, Will Fail'

Of all the claims made by the proponents of the Dodd-Frank Act, the most important are that the Dodd-Frank Act ends “too big to fail” and that it protects the American taxpayer “by ending bailouts.”One component of intervention of Government to bolster the bank balance sheets during financial crisis in 2008 was the Troubled Asset Relief Program (TARP). Although TARP may have saved the United States economy from a lengthy depression, it was perceived by many as a “bailout” of the banks whose own greed had precipitated the financial crisis. A number of institutions received TARP funds, but two – Citigroup and Bank of America – were identified as “systemically significant” and received additional equity infusions and other extraordinary aid from the government. There were significant concerns that the government’s intervention created moral hazard and that risk taking of financial institutions would remain unchecked if the market believed that the government would intervene if necessary to prevent the failure of the largest financial institutions.On July 21, 2010, President Obama signed the massive Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). But Dodd-Frank responds to TARP and attempts to change the phrase “too big to fail” to “too big, will fail”. Dodd-Frank created the Financial Stability Oversight Council (FSOC) as the new systemic risk regulator, with the authority to identify systemically significant institutions, subject them to additional prudential regulation by the Federal Reserve Board, and to mandate an orderly liquidation without the possibility of reorganization in the event they are not able to remain solvent on their own. Whether this new regime will ever be used and whether it will incentivize bank and nonbank financial institutions to reduce their size and complexity so they will not become subject to it, remain to be seen.

Harnessing Whales: The Role Of Shadow Price Disclosure In Money Market Mutual Fund Reform

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; line-height: normal; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; font-size: 10pt; mso-themecolor: text1;">The money market mutual fund industry is experiencing a sea change.<span style="mso-spacerun: yes;"> </span>Thanks, in large part, to their role in the 2008 market break, U.S. securities regulators have targeted money market funds for a structural overhaul.<span style="mso-spacerun: yes;"> </span>Runs on money market funds by institutional investors in the wake of the Lehman Brothers bankruptcy weakened the short-term credit market to the point of collapse.<span style="mso-spacerun: yes;"> </span>The resulting intervention of the Federal Reserve and the Treasury may have saved the economy from further damage but came at such a perceived cost that legislation now forbids it.<span style="mso-spacerun: yes;"> </span>Both the Securities and Exchange Commission (SEC) and the Financial Stability Oversight Council (FSOC) believe restructuring is necessary.<span style="mso-spacerun: yes;"> </span>Their only question appears to be exactly what form the product will take.</span></p><span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; line-height: normal; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; font-size: 10pt; mso-themecolor: text1;"> </span></p><span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; line-height: normal; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; font-size: 10pt; mso-themecolor: text1;">One of the elements being considered in the reform effort will be increased disclosure of money market fund shadow prices.<span style="mso-spacerun: yes;"> </span>The regulators have posited that more frequent and more available disclosure of fund shadow prices will lead to more discipline being exerted on the fund industry, especially by the institutional market.<span style="mso-spacerun: yes;"> </span>A revamped disclosure regime, however, has been in effect since monthly shadow price disclosures were imposed by the SEC in December 2010.</span></p><span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; line-height: normal; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; font-size: 10pt; mso-themecolor: text1;"> </span></p><span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; line-height: normal; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; font-size: 10pt; mso-themecolor: text1;">This study looks at the impact of those 2010 disclosure regulations on different sectors of the market.<span style="mso-spacerun: yes;"> </span>It seeks to identify a correlation between shadow prices and changes in assets for both retail and institutional funds.<span style="mso-spacerun: yes;"> </span>The authors assess the findings of the study and discuss the implications of those findings for the impending regulatory restructuring.<span style="mso-spacerun: yes;"> </span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Comment Letter to Financial Stability Oversight Council on Money Market Fund Reform

This letter on Money Market Fund Reform was submitted in response to the Financial Stability Oversight Council’s proposals of November 2012. I endorse the so-called “Minimum Balance at Risk Proposal,” in which sponsors would contribute or raise capital of one percent of a MMF’s assets while users would be subject to delayed redemption of three percent of their MMF account over $100,000. This approach could cause sponsors to internalize cost of portfolio security selection while forcing large MMF users to internalize some of the costs of running on the fund. The letter has one novel legal argument, which is that the Dodd-Frank Act itself appears to contemplate capital for MMFs. Since the practical effect of DFA's tightening of the Fed's emergency lending authority (Fed Res Act sec.13(3)) is to require a collateral haircut, MMFs (especially with fixed NAV) will need loss absorbing capital to access a Fed liquidity facility. If they do a repurchase agreement without capital, they may well break the buck; the requirement that the Fed evaluate the collateral may force a revaluation of portfolio assets that may threaten $1 fixed NAV at other MMFs as well as the borrowing Fund. MMFs are a novel financial intermediary, which arose out of regulatory arbitrage with an appeal principally for retail users who wanted a better interest rate deal than banks could offer. Some years later, institutional users found MMFs. These are cash-laden parties such as non-financial corporations, pension funds, securities lender, and asset managers, that want more safety than what the official banking system offers and also unrestricted liquidity, all without paying the costs of systemic stability. That is not possible -- unless, as now, the taxpayers bear the costs when the systemic bill comes due. The appeal of MMFs is the offer of a credit-screened diversified portfolio of financial assets that is safer than deposits in a single bank but highly liquid. If that value proposition holds, then the small restriction on liquidity and remote loss-bearing contingency should not be a significant disincentive for the institutional MMF user.

The Financial Stability Oversight Council's Proposals for Money Market Fund Reform

This paper examines the Financial Stability Oversight Council's proposals for money market fund reform. It finds the proposals flawed by the lack of empirical support for the underlying premise that MMFs are susceptible to runs such that drastic changes are needed in their structure. Similarly, it finds empirical support lacking for the Council’s proposed determination that MMFs spread systemic risk. The paper shows that “systemic risk” and “financial stability” are developing concepts not completely understood by either regulators or academic economists. It suggests that regulators should wait for the results of ongoing research before proceeding with MMF changes in the name of “systemic risk” when such changes could harm investors, damage the short-term credit markets, and have other unintended consequences for financial stability. Also, this paper argues that the Council cannot meaningfully consider the role of MMFs in the financial system until the role of banking organizations is clarified through reforms that remain as yet unimplemented.

Editorial

Editorial

The Financial Crisis and the Response of the United States: Will Dodd Frank Protect Us from the Next Crisis?

In July of 2010 Congress enacted the Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”). The Dodd Frank Act is the primary legislative response in the United States to the financial crisis of 2007-09. It makes wide-ranging and significant changes to a number of aspects of financial services regulation. This article examines the eight most significant initiatives undertaken in the Dodd Frank Act; initiatives which are intended to avoid the next financial crisis, to give regulators the tools to deal with a future crisis when it occurs and to substantially increase the levels of protection provided to U.S. consumers of financial services. The Act creates a new Financial Stability Oversight Council with the broad responsibility to anticipate and to take measures to avoid the next financial crisis. It gives to the Federal Deposit Insurance Corporation the authority to liquidate very large financial services companies in an orderly manner in the event they fail. It creates a new National Insurance Office in the Department of the Treasury to provide limited oversight of our state-regulated insurance industry and, more importantly, to collect information on the risk to the U.S. financial system generated by the failure of the largest insurance companies. It provides for more intensive and effective regulation of credit rating agencies, overseen by a new Office of Credit Ratings at the Securities and Exchange Commission. It imposes registration requirements on hedge fund advisers and provides a process for collecting information on the risks posed to the U.S. financial system by the investment activities of hedge funds. It mandates significant new regulation at the Commodities Futures Trading Commission and the Securities and Exchange Commission over the trading of derivatives, requiring exchange-based trading for some classes of derivatives and for transparency in the trading of customized derivatives not suitable for exchanges. It requires a variety of corporate governance reforms for publicly traded companies, including a “say on pay” (a shareholders’ advisory vote on executive compensation plans), increased disclosures to shareholders, independent board compensation committees and consultants, and board risk committees for large financial services companies. Finally, it creates a major new agency, the Bureau of Consumer Financial Protection, located in the Federal Reserve System with significant powers to protect consumers in their purchases of a broad range of financial products. Each of these eight initiatives undertaken in Dodd Frank is complex and dependent to a significant degree on the promulgation of regulations for its implementation. It remains to be seen if these regulations will reflect the spirit of Dodd Frank’s ambitious and serious approach to avoiding or, at least, to providing the tools to survive the next financial crisis. This article offers a summary and some comments on the Dodd Frank initiatives outlined above. The ultimate effect of the Dodd Frank Act will depend to a large extent upon how it is implemented by U.S. financial regulators.

Systemic Risks and Macroprudential Bank Regulation: A Critical Appraisal

This paper discusses and critically appraises recent developments in the definition, measurement, and regulation of systemic risks. Although the issue of systemic risks has been subjected to considerable study, there is not widespread agreement on how to define this concept. Initial efforts to measure systemic risks emphasized aggregate financial ratios, and only recently have a variety of institution-level systemic-risk measurement techniques been proposed. Thus, regulators charged with conducting macroprudential regulation, such as the Financial Stability Oversight Council created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, must act without a consensus about how to define and measure the form of risk they are charged with limiting. There are largely unexplored pitfalls associated with establishing a macroprudential-supervision apparatus: (1) An enlarged potential for regulatory capture and associated welfare losses; (2) A danger of over-relying on centralized governmental command-and-control mechanisms that might be at least as subject to breakdowns as private markets while under-relying on private market discipline; and (3) Failures to contemplate a role for private contractual (Coasian) solutions to externality problems that contribute to systemic-risk problems and to recognize that a broadened scope of regulations can actually undermine the incentives for financial institutions to contain these externality problems.