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Avoiding the ‘regulatory capture’ trap

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Another day, another Senate hearing on the financial industry.

The man in the hot seat today: New York Federal Reserve President William Dudley. He was grilled about something called “regulatory capture,” the idea that regulators can be “captured” or overly influenced by the people and companies they’re supposed to oversee. Dudley said the banking system is safer now than six years ago. Separately, the Fed has announced a review of its bank supervision programs.

Sid Shapiro, a professor at Wake Forest University, cautions that if regulators are too cozy with their charges, banks might get away with things they shouldn’t. Regulatory capture isn’t a problem unique to the Fed but its impact at the Fed can be especially dangerous and far-reaching, says Dan Carpenter, a Harvard University professor who studies the regulatory agencies. Lawrence Baxter, a professor at Duke University School of Law, says the Fed should be more transparent – and draw fewer of its employees from Wall Street. 

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