Financial regulation, non-compliance risks and control: A statistical approach

Article type: Research Article

Authors: Tapiero, Charles S.

Affiliations: Department of Finance and Risk Engineering, Polytechnic School of Engineering, New York University, New York, NY, USA. E-mail: [email protected]

Abstract: Financial Regulation is a socio-political and economic need that has risks and a price. Globalization, the growth financial institutions, both national and a-national, complex financial futures and other products, financial chains, intermediaries and networks, etc. have increased the complexity of finance. Not least, a growth of financial technologies (both in hardware and software) has amplified opportunities to profit as well as challenged regulators and regulation. A regulatory response, following the 2007–2009 financial crisis, based on the Dodd–Frank act has at the same time generated hundreds of regulations, some misunderstood and misinterpreted by an endless series of court cases. These developments have rendered compliance, both complex and at best costly and elusive. While an extensive research on regulation has focused on the implications of one or another regulatory edict, little research has focused on defining non-compliance and defining controls to an increasingly strategic regulatory environment. The purpose of this paper is to raise a number of regulation risks and provide a strategic and statistical (gaming) approach to regulation and its control based on a “regulation game” of a regulated financial institution and its regulators. Unlike previous studies focused on the scope and the intent of regulation, this paper calls attention to the implications of controls.

Keywords: Regulation, finance, games, Bayesian theory

DOI: 10.3233/RDA-140104

Journal: Risk and Decision Analysis, vol. 5, no. 2-3, pp. 113-127, 2014