Published In

Annals of the American Academy of Political and Social Science

Document Type

Working Paper

Publication Date

2013

Subjects

Canadian law; Financial regulation; innovation; Basel II; Asset-Backed Commercial Paper (ABCP) Crisis; Volcker Rule; derivatives; securitization; innovation-framing regulation; new governance

Abstract

This paper aims to provide insights into the effective regulation of private sector innovation. It coins a term – “innovation-framing regulation” – to describe a particular quality of the regulation that characterized much of financial regulation in the recent era. After briefly sketching a particular financial innovation (securitization and the marketing of securitized assets on the derivatives markets) it describes three regulatory interactions with that innovation: the Basel II Capital Accords, the Asset-Backed Commercial Paper Crisis in Canada, and the ongoing notice-and-comment rulemaking process surrounding the Volcker Rule in the United States. While each case study is different, in each one the regulatory regime exhibits a lack of understanding about the phenomenon of innovation it is grappling with. The paper identifies three key assumptions that are ripe for re-evaluation: the notion that private sector innovation is beneficial, virtually by definition; the assumption that the regulatory moment is the crucial moment in regulatory design; and the belief that innovation somehow sits outside regulation and can be untouched by it. The paper argues that effective regulation of private sector innovation requires a clearer and more nuanced understanding of innovation, and engagement with the normative choices underpinning innovation-framing regulation.

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