In the paper, It’s (Not) All About the Money: Using Behavioral Economics to Improve Regulation of Risk Management in Financial Institutions, forthcoming in the University of Pennsylvania Journal of Business Law, I focus on the Dodd-Frank Act’s risk management provisions, and specifically the requirement that financial institutions create separate risk committees. The goal of this regulation is to mitigate risks to the financial stability of the US, because despite media attention to financial institutions and great regulatory efforts, including the focus on risk management, little has changed in financial institutions’ business cultures. Indeed, excessive risk-taking by such institutions is still rampant. In the article, I argue that risk-related decision makers do not make decisions about risk-taking in a vacuum, but in an environment where multiple factors, noticed and unnoticed, can influence the decisions. Such factors include cognitive-related biases and group-related biases, and there are tools, which have not yet been analyzed in literature that regulators can use to reduce undesired or excessive risk-taking. Indeed, by shaping such environmental factors in which risk-related decisions in financial institutions are made, regulation can help actors make better, less pro-risk-taking, choices. With the goal of reducing excessive risk-taking by financial institutions, this article builds on an emerging focus in behavioral law and economics on prospects for “debiasing” actors through the structure of legal rules. Under this approach, legal policy may reduce biases’ effects and judgment errors by directly addressing them. Doing so will then help the relevant actors either to reduce or to eliminate these effects and errors. Accordingly, the article suggests using behavioral economic-based legal guidelines to supplement the Dodd-Frank Act‘s risk committee’s requirement. Such legal guidelines would help reduce the degree of biased behavior that risk committees exhibit.
Posts Tagged ‘Nizan Packin’
In the paper, The Case Against the Dodd-Frank Act’s Living Wills: Contingency Planning Following the Financial Crisis, forthcoming in the Berkeley Business Law Journal, I focus on the Dodd-Frank Act’s “living will” requirement that mandates that systemically important financial institutions (SIFIs) develop business strategic analyses, and submit plans for reorganization or resolution of their operations to regulators. The goal of this regulation is to mitigate risks to the financial stability of the US and encourage last-resort planning – in order to enable a rapid and efficient response in the event of an emergency – for multinational financial institutions that are so large that their insolvency could shake the entire financial system and the economy. Nearly everyone believes that living wills are just about the perfect solution to the problems highlighted in the recent financial crisis; regulators from all over the world strongly support the concept and have been advocating for its implementation. Nevertheless, I argue that this solution is ill-designed to address the too-big-to-fail problem, and that living wills are not the silver bullet that regulators seem to think they are. My paper shows that there are a lot of open issues concerning living wills, and that there are real questions as to how effective they can be.