Keith Poole, Howard Rosenthal and I have spent the last couple of years working on a manuscript on the political economy of the financial crisis. That joint work has inspired my to write this paper modeling the effects of policy complexity on regulatory policymaking. Although the argument is formalized, it is a simple one. Policy will tend to be biased towards the interests of the regulated industry in areas where policymaking is complex. I hope the paper contributes some useful insights to financial market regulation.

In the Treasury Department’s white paper on its financial reform plans, the word “robust” is used 47 times in 101 pages. Some choice examples:

· [our plan will] promote robust supervision and regulation of financial firms.

· [financial holding companies] should be subject to robust consolidated supervision and regulation, regardless of whether the firm owns an insured depository institution.

· [the SEC] should require robust reporting by issuers of asset backed securities.

· [the SEC] should promote robust policies and procedures that manage and disclose conflicts of interest [for credit rating agencies].

· The CFPA [consumer financial protection agency] should be an independent agency with stable, robust funding.

· Regulators will need to require that CCPs [central counterparties] impose robust margin requirements

· The CFPA should also establish a robust research and statistics department

It is too early to tell whether the new regulatory regime will be effective, efficient, and equitable. But it will certainly be robust!