Academic journal article Duke Law Journal

Adaptive Financial Regulation and Regtech: A Concept Article on Realistic Protection for Victims of Bank Failures

Academic journal article Duke Law Journal

Adaptive Financial Regulation and Regtech: A Concept Article on Realistic Protection for Victims of Bank Failures

Article excerpt


Frustrated by the seeming inability of regulators and prosecutors to hold bank executives to account for losses inflicted by their companies before, during, and since the financial crisis of 2008, some scholars have suggested that private-attorney-general suits such as class action and shareholder derivative suits might achieve better results. While a few isolated suits might be successful in cases where there is provable fraud, such remedies are no general panacea for preventing large-scale bank-inflicted losses. Large losses are nearly always the result of unforeseeable or suddenly changing economic conditions, poor business judgment, or inadequate regulatory supervision-usually a combination of all three.

Yet regulators face an increasingly complex task in supervising modern financial institutions. This Article explains how the challenge has become so difficult. It argues for preserving regulatory discretion rather than reducing it through formal congressional direction. The Article also asserts that regulators have to develop their own sophisticated methods of automated supervision. Although also not a panacea, the development of "RegTech " solutions will help clear away volumes of work that understaffed and underfunded regulators cannot keep up with. RegTech will not eliminate policy considerations, nor will it render regulatory decisions noncontroversial. Nevertheless, a sophisticated deployment of RegTech should help focus regulatory discretion and public-policy debate on the elements of regulation where choices really matter.


It is a privilege and pleasure to participate in a symposium dedicated to my distinguished friend and colleague, Jim Cox. I have always been in awe of Jim's prodigious scholarship and the reputation he has rightly earned as the nation's leading market-regulation authority. Jim's concern for the victims of market misconduct has been persistent and forceful, perhaps even at the cost of opportunities that might have brought him greater financial reward and political prestige. I can only hope that my somewhat perverse approach to the problem of bank failures does not disappoint him for being insufficiently aggressive toward bankers and the banking markets. I know his friendship would never allow him to show that disappointment, even if he felt it.


In the lingering aftermath of the 2008 financial crisis, popular anger about the damage wrought on the economy and individual welfare still simmers. (1) This anger visibly flared up again in the 2016 presidential election process. (2) Financial companies, particularly as embodied by big banks and Wall Street, are the primary objects of this public fury. In this motif, bankers have become banksters and banks have become too big to jail-even in the view of some judges and commentators. (3) Regulators have been excoriated for being captured or at least asleep at the switch in their failure to prevent the 2008 crisis and for bailing out some of the world's biggest banks and other financial companies.

The wreckage following the 2008 crisis is strewn with individual and multiparty lawsuits and complex multigovernment and multiparty settlements. Billions of dollars have been paid out by banks and other financial companies as reparations for securities frauds and violations of the federal False Claims Act. (4) Yet successful private class action suits (5) against financial institutions have actually been few and far between, (6) and a majority of the crisis-related actions have failed. (7) Amid a perception that regulators and prosecutors are either incapable of taking or unwilling to take sufficient remedial action to punish financial miscreants and render victims of financial wrongs whole, critics have suggested that private-attorney-general suits and shareholder derivative suits might be the best complement to a generally deficient enforcement regime. (8)

This potential solution to regulatory and prosecutorial shortcomings has a facial attractiveness. …

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