Tuesday, July 29, 2014
Matthew C. Turk has posted The Convergence of Insurance with Banking and Securities Industries, and the Limits of Regulatory Arbitrage in Finance on SSRN with the following abtract:
This Article explores recent overlooked innovations in insurance — namely, the widespread convergence of the insurance industry with other financial services traditionally performed by banking and securities firms — and argues that they present dramatic illustrations of the two fundamental “boundary problems” that afflict all financial regulation. The first problem is a question of jurisdictional boundaries: to what degree should diverse regulations be harmonized across jurisdictions? The second concerns definitional boundaries: within a given jurisdiction, how should distinctions be drawn among financial products and firms that perform similar economic functions? The Article then employs the framework of regulatory boundaries to evaluate a number of policy issues raised by insurance-related reforms in Dodd-Frank and various international initiatives that followed the 2008 financial crisis, both of which represent first steps towards a potentially bold new regulatory approach.
At bottom, both boundary problems are a product of the possibility for regulatory arbitrage across jurisdictions or industry definitions, and the potential inevitably of a loosely regulated “shadow finance” sector. The opportunity for regulatory arbitrage is a key variable in assessing financial reforms that draw regulatory boundaries, yet reliable empirical estimates of its magnitude are largely unavailable. For this reason, recent proposals to require federal agencies to apply quantitative cost-benefit analysis to financial regulations may fall short of expectations. Sensitive to this uncertainty, this Article presents an analytical framework that provides some tentative policy prescriptions and, at a minimum, sheds greater light on the tradeoffs involved in the regulation of insurance and finance in a post-2008 Crisis world.