Executive Summary
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The US financial services sector is heavily regulated.
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The regulatory structure is quite complicated, with a myriad of regulatory agencies and overlapping responsibilities.
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This structure is daunting and confusing, and it has its costs and complications.
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However, a great advantage to this complicated and duplicative system is that it gives someone with an innovative idea more than one place to turn; there is no monopoly regulator.
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Although there are periodic calls for simplifying the system, a major cost from simplification would be this reduced choice, and consequent reduced innovation.
Introduction
The US system of financial regulation has received heightened scrutiny recently, because of the financial debacle of 2007–2009. No observer can come away from that scrutiny without being overwhelmed by the complexity of financial regulation in the United States. Many are convinced that this system’s complexity is somehow responsible, at least in part, for the debacle; and, in any event, they would argue that the system must be reformed and simplified.
Any enterprise that enters the US financial services industry must immediately confront this regulatory system and its complexity. The reasons for having financial regulation—and at least some of the reasons for the system’s complexity—are certainly worth understanding. That there are actually strengths and advantages to that complexity should be understood as well.
Finance Is Special
Finance is special, for at least four reasons.
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Finance is ubiquitous. Every individual, enterprise, organization, or government requires finance, even if it is self-finance, to smooth income and expenditure flows, and to provide the basis for investment. The payments system of a modern economy—cash, checks, credit and debit cards, electronic transfers—involves finance as well.
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Finance involves an unavoidable time sequencing that creates special problems: Finance always involves an initial conveyance of funds—a loan, an investment—and then a later reversal of the flow of funds—the loan repayment (plus interest), a stream of dividends, etc.1 Because of this time sequencing, the lender or investor has to be worried about the prospects of being repaid. But asymmetric information problems between the lender and the borrower (or between the investor and the enterprise) will adversely affect the lender’s (investor’s) ability to determine the prospects for repayment.
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Many individuals have difficulties understanding finance and its complexities.
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At least partly because of reasons 1, 2, and 3, the financial sector is heavily and extensively regulated;2 financial regulation, too, is ubiquitous.
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