The term “regulatory capture” refers to what happens when regulators swim so close to the companies they regulate that they get snared in those companies’ gravitational fields. What results is tolerant, indulgent regulation, or none at all. For a good example, think of banking regulation before 2008. The result of regulators seeing things the banks’ way: the 2008 financial crisis and a long, deep recession.
Regulatory capture has come up in public discussions three times in recent days: a top banking industry lawyer says it’s a “myth”; a top banking regulator says there’s still too much of it; and a top securities regulator may have inadvertently provided a great example of it.
Taking aim at “the myth of regulatory capture,” he continued: “Recently, this supposition of regulatory capture has become as pervasive as it is false…. I have never experienced a situation that an examiner was so close to an institution that the examiner went easy on that institution.” Sharing the dais with him at the time were representatives of the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Bank of New York and the industry self-regulator Finra, the Journal reported.
Cohen’s concern is that regulators desperate to disprove the “myth” will be especially, and unreasonably, hard on the banks, which will only make regulation less effective and, of course, make it harder for banks to do business.
Read on.