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AN ALTERNATIVE STORY OF THE LAW AND REGULATION OF RISK MANAGEMENT
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This Article examines the history of the regulation of risk
management in the banking industry. Despite the centrality of risk
management to contemporary banking law and regulation, its fundamental
precepts have largely escaped scrutiny. This Article first summarizes what
it means to manage risk and then contrasts a traditional story of risk
management regulation with an alternative story. The traditional story
posits that regulatory interventions are practical, functional responses to
threats to the achievement of regulators’ statutory mandates of system-wide
financial stability and institution-level safety and soundness. In the course
of summarizing this traditional account, the Article undertakes the first
systematic review of the legislative and regulatory actions by which risk
management became a public regulatory subject. The alternative story, by
contrast, acknowledges the empirical fact of risk management as an
enhanced regulatory priority, but interrogates its normative assumptions. It
presents the regulatory focus on risk management as more of a cultural
crutch in response to growing anxiety about endemic uncertainty in
financial markets—as a reflection of the aspirations underlying the practice
rather than the practice as such. Particular attention is given to how
regulators have prioritized questions of risk control over more basic
questions of risk assessment, and, in the process, have failed to take
account of how banks and regulators view risk in different terms. Though
its implications are troubling, this alternative story sheds light on where
authorities should focus reform efforts to improve risk management
regulation.