Structural Regulation as Antidote to Complexity Capture

Authors

  • Robert F. Weber

    Wellspring Professor of Entrepreneurship, Economic Development, and Business Law
    1. Entrepreneurship, Economic Development, and Business Law, University of Tulsa College of Law
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  • I thank the University of Tulsa College of Law for the generous summer research grant that supported this research.

Abstract

The [structural] approach rejects the idea that some institutions should be allowed to become “too important to fail”. Instead of asking who should perform what regulation, it asks why we regulate banks. It draws a clear distinction between different activities that banks undertake. The banking system provides two crucial services to the rest of the economy: providing companies and households a ready means by which they can make payments for goods and services and intermediating flows of savings to finance investment. Those are the utility aspects of banking where we all have a common interest in ensuring continuity of service.[1]

An accepted principle of system design is to avoid complexity and tight integration of different components or interfaces. Complexity is the enemy of both reliability and security, engineers are fond of saying. The more complex the system, the greater the chance of the unexpected interaction of components, even when they are not faulty in themselves. A truly complex system may be impossible to fully comprehend, and the unexpected interactions may not appear for a very long time … .[2]

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