We investigate how loan terms respond to competition between lenders when borrowers have multidimensional private information. In our model, competitive lenders screen borrowers using contracts that consist of an interest rate and a collateral requirement. Compared to a monopolistic lender, a competitive market offers uniformly lower collateral requirements, and a larger share of funded projects are negative-NPV. The competitive market may be more or less efficient than the monopolist, depending on the deadweight cost of collateral and the degree of selection externalities. In principle, efficiency could be greatly improved by an uninformed regulator who completely controls the interest rate schedule. However, simpler policies such as minimum collateral or higher interest rates do little to improve efficiency.
{"title":"Competition and Lending Standards with Multidimensional Private Information","authors":"Seokwoo Lee, W. Mann","doi":"10.2139/ssrn.3905659","DOIUrl":"https://doi.org/10.2139/ssrn.3905659","url":null,"abstract":"We investigate how loan terms respond to competition between lenders when borrowers have multidimensional private information. In our model, competitive lenders screen borrowers using contracts that consist of an interest rate and a collateral requirement. Compared to a monopolistic lender, a competitive market offers uniformly lower collateral requirements, and a larger share of funded projects are negative-NPV. The competitive market may be more or less efficient than the monopolist, depending on the deadweight cost of collateral and the degree of selection externalities. In principle, efficiency could be greatly improved by an uninformed regulator who completely controls the interest rate schedule. However, simpler policies such as minimum collateral or higher interest rates do little to improve efficiency.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"117 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86091406","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
How successful are the SEC’s attempts to regulate dynamic risk in financial markets? Using mutual fund disclosure data from two financial shocks—the Puerto Rican debt crisis and COVID-19—we find evidence that SEC open-ended regulations, like the obligation to disclose changing market conditions, are largely successful in regulating dynamic, future risk. We find evidence of widespread and, often, detailed disclosures for new risks. But not all funds disclose new risks, and those that do vary in specificity ranging from individualized to generic disclosures. This creates perverse incentives for funds to opt-out of disclosure or downplay threats with boilerplate language when new risks are emerging. We recommend several SEC interventions to improve dynamic risk disclosures including empirically monitoring disclosures, issuing guidance when problematic variation is observed, and enforcing disclosure standards.
{"title":"Regulating Dynamic Risk in Changing Market Conditions","authors":"S. Smelcer, A. Tucker, Yusen Xia","doi":"10.2139/ssrn.3905506","DOIUrl":"https://doi.org/10.2139/ssrn.3905506","url":null,"abstract":"How successful are the SEC’s attempts to regulate dynamic risk in financial markets? Using mutual fund disclosure data from two financial shocks—the Puerto Rican debt crisis and COVID-19—we find evidence that SEC open-ended regulations, like the obligation to disclose changing market conditions, are largely successful in regulating dynamic, future risk. We find evidence of widespread and, often, detailed disclosures for new risks. But not all funds disclose new risks, and those that do vary in specificity ranging from individualized to generic disclosures. This creates perverse incentives for funds to opt-out of disclosure or downplay threats with boilerplate language when new risks are emerging. We recommend several SEC interventions to improve dynamic risk disclosures including empirically monitoring disclosures, issuing guidance when problematic variation is observed, and enforcing disclosure standards.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78840508","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Big tech firms entering financial services can scale up rapidly with user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services. In addition to traditional policy concerns such as financial risks, consumer protection and operational resilience, the entry of big techs into financial services gives rise to new challenges surrounding the concentration of market power and data governance. The current framework for regulating financial services follows an activities-based approach where providers must hold licences for specific business lines. There is scope to address the new policy challenges by developing specific entity-based rules, as proposed in several key jurisdictions – notably the European Union, China and the United States.
{"title":"Regulating Big Techs in Finance","authors":"A. Carstens, S. Claessens, F. Restoy, H. Shin","doi":"10.2139/ssrn.3901736","DOIUrl":"https://doi.org/10.2139/ssrn.3901736","url":null,"abstract":"Big tech firms entering financial services can scale up rapidly with user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services. In addition to traditional policy concerns such as financial risks, consumer protection and operational resilience, the entry of big techs into financial services gives rise to new challenges surrounding the concentration of market power and data governance. The current framework for regulating financial services follows an activities-based approach where providers must hold licences for specific business lines. There is scope to address the new policy challenges by developing specific entity-based rules, as proposed in several key jurisdictions – notably the European Union, China and the United States.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84496669","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Two decades of economics research has repeatedly made the assertion that organizations as well as individuals do not have adequate incentive to invest in cybersecurity. Absent security, associated costs are imposed on third parties rather than producers of insecurity. Cybersecurity is thus a private good with externalities, one that will require regulation to prevent market failure. Underlying this body of research is the assumption that all organizations have the same business drivers, a similar attack surface, and a uniformly informed consumer base. This paper questions these assumptions and outlines seven naturally occurring incentives for organizations to invest in cybersecurity. Furthermore, I provide examples of how these incentives have driven investment in cybersecurity across different sectors. While the applicability of these incentives differs both across and within sectors, any cybersecurity public policy interventions must consider the resulting nuances. Cybersecurity covenants established absent the sword of regulation may be both more effective and sustainable, as they evolve with the experience and exposure of the stakeholders.
{"title":"Covenants Without the Sword: Market Incentives for Cybersecurity Investment","authors":"Vaibhav Garg","doi":"10.2139/ssrn.3896578","DOIUrl":"https://doi.org/10.2139/ssrn.3896578","url":null,"abstract":"Two decades of economics research has repeatedly made the assertion that organizations as well as individuals do not have adequate incentive to invest in cybersecurity. Absent security, associated costs are imposed on third parties rather than producers of insecurity. Cybersecurity is thus a private good with externalities, one that will require regulation to prevent market failure. Underlying this body of research is the assumption that all organizations have the same business drivers, a similar attack surface, and a uniformly informed consumer base. This paper questions these assumptions and outlines seven naturally occurring incentives for organizations to invest in cybersecurity. Furthermore, I provide examples of how these incentives have driven investment in cybersecurity across different sectors. While the applicability of these incentives differs both across and within sectors, any cybersecurity public policy interventions must consider the resulting nuances. Cybersecurity covenants established absent the sword of regulation may be both more effective and sustainable, as they evolve with the experience and exposure of the stakeholders.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"128 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87634201","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The failure to fully internalize externalities from production and consumption, including on future generations, is supposed to be at the core of the perceived failure to ensure (ecological) sustainability within the realm of antitrust enforcement. While some argue that sustainability should constitute a goal in itself that must be balanced against economic efficiency in antitrust analysis, we instead want to explore whether and how sustainability can be incorporated into a consumer welfare approach. We make a key distinction between what we term an individualistic and a collective consumer welfare analysis. Within an individualistic consumer welfare analysis, consumers’ willingness-to-pay is measured ceteris paribus, holding other consumers’ choices fixed. In a collective consumer welfare analysis, consumers may express their willingness-to-pay also for the choices of others and, thereby, also for the reduction of externalities on themselves. Borrowing from environmental and resource economics, we also discuss more indirect ways of incorporating such externalities. And we critically assess the possibility of ‘laundering’ consumers’ sustainability preferences in the light of supposed biases and cognitive limitations. Finally, we relate our analysis to the Draft Horizontal Guidelines of the European Commission, published in March 2022. antitrust, consumer welfare, conjoint analysis, contingent valuation, Draft EU Horizontal Guidelines, environmental economics, externalities, laundering preferences, sustainability, willingness-to-pay
{"title":"The Scope and Limitations of Incorporating Externalities in Competition Analysis within a Consumer Welfare Approach","authors":"R. Inderst, Stefan Thomas","doi":"10.2139/ssrn.3896243","DOIUrl":"https://doi.org/10.2139/ssrn.3896243","url":null,"abstract":"The failure to fully internalize externalities from production and consumption, including on future generations, is supposed to be at the core of the perceived failure to ensure (ecological) sustainability within the realm of antitrust enforcement. While some argue that sustainability should constitute a goal in itself that must be balanced against economic efficiency in antitrust analysis, we instead want to explore whether and how sustainability can be incorporated into a consumer welfare approach. We make a key distinction between what we term an individualistic and a collective consumer welfare analysis. Within an individualistic consumer welfare analysis, consumers’ willingness-to-pay is measured ceteris paribus, holding other consumers’ choices fixed. In a collective consumer welfare analysis, consumers may express their willingness-to-pay also for the choices of others and, thereby, also for the reduction of externalities on themselves. Borrowing from environmental and resource economics, we also discuss more indirect ways of incorporating such externalities. And we critically assess the possibility of ‘laundering’ consumers’ sustainability preferences in the light of supposed biases and cognitive limitations. Finally, we relate our analysis to the Draft Horizontal Guidelines of the European Commission, published in March 2022.\u0000antitrust, consumer welfare, conjoint analysis, contingent valuation, Draft EU Horizontal Guidelines, environmental economics, externalities, laundering preferences, sustainability, willingness-to-pay","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"72 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76034104","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Until late 2018, most of China’s amino acid sales occurred in Asia. However, after the African Swine Fever led to the destruction of nearly half of China’s pig population, China's subsidized amino acid industry turned to the United States to sell their products. In 2019, the total U.S. imports of Lysine — a key amino acid — from China tripled over a four-month period, and a year later it doubled again. While China’s pig population almost recovered, U.S. sales of amino acids imported from China remain elevated, especially for threonine, which is typically used for pigs and poultry. China has already established global dominance in threonine, with over 85% of global capacity for this important amino acid. Left unchecked, Chinese domination of key sectors of the U.S.’s amino acids industry would severely damage U.S. production. We estimate that the demise of critical sectors of the U.S. amino acid industry would destroy nearly 30,000 jobs of people in the U.S. who are either involved in amino acid production or have a direct or indirect connection to its production. It would also reduce domestic economic activity by $15 billion a year, with tax revenues at the federal, state and local levels reduced by nearly $9 billion over the next ten years. These trends have created the potential for Chinese manipulation of the markets for these key inputs, which could result in reduced choice for producers and food security issues for U.S. consumers.
{"title":"The Impact of the Amino Acids Industry on the U.S. Economy","authors":"Ike Brannon, Russell Kashian","doi":"10.2139/ssrn.3894589","DOIUrl":"https://doi.org/10.2139/ssrn.3894589","url":null,"abstract":"Until late 2018, most of China’s amino acid sales occurred in Asia. However, after the African Swine Fever led to the destruction of nearly half of China’s pig population, China's subsidized amino acid industry turned to the United States to sell their products. In 2019, the total U.S. imports of Lysine — a key amino acid — from China tripled over a four-month period, and a year later it doubled again. While China’s pig population almost recovered, U.S. sales of amino acids imported from China remain elevated, especially for threonine, which is typically used for pigs and poultry. China has already established global dominance in threonine, with over 85% of global capacity for this important amino acid. Left unchecked, Chinese domination of key sectors of the U.S.’s amino acids industry would severely damage U.S. production. We estimate that the demise of critical sectors of the U.S. amino acid industry would destroy nearly 30,000 jobs of people in the U.S. who are either involved in amino acid production or have a direct or indirect connection to its production. It would also reduce domestic economic activity by $15 billion a year, with tax revenues at the federal, state and local levels reduced by nearly $9 billion over the next ten years. These trends have created the potential for Chinese manipulation of the markets for these key inputs, which could result in reduced choice for producers and food security issues for U.S. consumers.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76656269","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Within the e-book market, the self-publishing business model that has been boosted by digitalization has become increasingly important. Although self-publishing circumvents distribution intermediaries, consequently yielding unambiguous advantages both for authors and consumers, it also raises some concerns related to Amazon's accrued market dominance. This paper analyzes the pros and the cons of this emerging business by proposing a platform model where consumers are ex ante uncertain about their true preferences on the content, and each content provider sells a differentiated product variety and determines its price around a Salop circle under two structures: self-distribution and delegated distribution. Our results suggest that: i) self-publishing can result in higher e-book prices for consumers under certain circumstances; ii) publishing companies could be driven out of the e-book market by Amazon in the segment of non-specialized books or novels written by emerging authors; however iii) Amazon's dominance over traditional publishing companies should not cause damage to final consumers and, consequently, does not call for regulatory action.
{"title":"Self Versus Delegated Distribution in Digital Platforms: The Case of Amazon","authors":"Giuseppe D’Amico, R. Flores-Fillol, B. Theilen","doi":"10.2139/ssrn.3892869","DOIUrl":"https://doi.org/10.2139/ssrn.3892869","url":null,"abstract":"Within the e-book market, the self-publishing business model that has been boosted by digitalization has become increasingly important. Although self-publishing circumvents distribution intermediaries, consequently yielding unambiguous advantages both for authors and consumers, it also raises some concerns related to Amazon's accrued market dominance. This paper analyzes the pros and the cons of this emerging business by proposing a platform model where consumers are ex ante uncertain about their true preferences on the content, and each content provider sells a differentiated product variety and determines its price around a Salop circle under two structures: self-distribution and delegated distribution. Our results suggest that: i) self-publishing can result in higher e-book prices for consumers under certain circumstances; ii) publishing companies could be driven out of the e-book market by Amazon in the segment of non-specialized books or novels written by emerging authors; however iii) Amazon's dominance over traditional publishing companies should not cause damage to final consumers and, consequently, does not call for regulatory action.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"43 4","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91471560","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over the past three decades, the international competition policy and law community has been affected and dramatically altered by two parallel developments: (i) the significant expansion in the number of developing, transition and emerging market economies with modern competition policies and antitrust/competition laws to more than 100 countries and jurisdictions at the present time; and, (ii) the growing literature, discourse, and disputes on whether the insights from behavioral economics and related behavioral literatures are relevant to and should be applied to the design, administration and enforcement of competition policies and antitrust/competition laws and related policies and laws by countries and multi-country competition law jurisdictions such as the European Union and COMESA (the Common Market for Eastern and Southern Africa). However, comparatively little research and policy analysis have been conducted on assessing the interactions between these two parallel global developments. This working paper attempts to make a contribution to addressing this gap, through providing an overview of, and some guidance on, the strengths and limitations of behavioral economics and related less conventional literatures for the design, administration and enforcement of competition and related policies and laws in developing, transition and emerging market economies and in the increasingly integrated global economy. Particular attention is given to the distinctive market, socioeconomic, institutional and political economy conditions and challenges in developing economies that are important to whether, why, when and how the insights from behavioral economics should be applied to their often comparatively new competition policies, laws, rules, functions, institutions, and authorities. The guidance provided in sections 3.0 and 4.0 encompasses seventeen guidelines on the selective application of behavioral science insights to competition law matters in developing economy markets, and eleven behavioral markers of anticompetitive and non-compliant conduct, which can assist with the development of behaviorally informed theories of competitive and consumer harm. The working paper includes a quite extensive bibliography with links to articles and studies when available, in order to assist readers who may not be very familiar with some of these less conventional literatures. Furthermore, footnotes and appendices are used extensively to provide additional information to readers interested in a specific subject, while keeping the main text of the report at a “relatively reasonable” length.
{"title":"Practical Guide to Applying Behavioral Economics To Competition Policy and Law In Developing Economies","authors":"D. Ireland","doi":"10.2139/ssrn.3891036","DOIUrl":"https://doi.org/10.2139/ssrn.3891036","url":null,"abstract":"Over the past three decades, the international competition policy and law community has been affected and dramatically altered by two parallel developments: (i) the significant expansion in the number of developing, transition and emerging market economies with modern competition policies and antitrust/competition laws to more than 100 countries and jurisdictions at the present time; and, (ii) the growing literature, discourse, and disputes on whether the insights from behavioral economics and related behavioral literatures are relevant to and should be applied to the design, administration and enforcement of competition policies and antitrust/competition laws and related policies and laws by countries and multi-country competition law jurisdictions such as the European Union and COMESA (the Common Market for Eastern and Southern Africa). However, comparatively little research and policy analysis have been conducted on assessing the interactions between these two parallel global developments. This working paper attempts to make a contribution to addressing this gap, through providing an overview of, and some guidance on, the strengths and limitations of behavioral economics and related less conventional literatures for the design, administration and enforcement of competition and related policies and laws in developing, transition and emerging market economies and in the increasingly integrated global economy. Particular attention is given to the distinctive market, socioeconomic, institutional and political economy conditions and challenges in developing economies that are important to whether, why, when and how the insights from behavioral economics should be applied to their often comparatively new competition policies, laws, rules, functions, institutions, and authorities. The guidance provided in sections 3.0 and 4.0 encompasses seventeen guidelines on the selective application of behavioral science insights to competition law matters in developing economy markets, and eleven behavioral markers of anticompetitive and non-compliant conduct, which can assist with the development of behaviorally informed theories of competitive and consumer harm. The working paper includes a quite extensive bibliography with links to articles and studies when available, in order to assist readers who may not be very familiar with some of these less conventional literatures. Furthermore, footnotes and appendices are used extensively to provide additional information to readers interested in a specific subject, while keeping the main text of the report at a “relatively reasonable” length.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89268474","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jorge Padilla, J. Perkins, S. Piccolo, P. Reynolds
This paper focuses on industries that require intensive investment to compete and innovate well before demand materialises (or fails to do so). In these industries, the existence of exit barriers may cause firms to become “zombies” ex post and result in significant underinvestment ex ante. We first discuss the link between the investment decisions of firms and the existence and significance of exit barriers. Then, we consider the role of mergers as an exit mechanism that promotes efficient investment and fosters competition. We conclude with a discussion about optimal merger policy.
{"title":"Merger Control Z","authors":"Jorge Padilla, J. Perkins, S. Piccolo, P. Reynolds","doi":"10.2139/ssrn.3889230","DOIUrl":"https://doi.org/10.2139/ssrn.3889230","url":null,"abstract":"This paper focuses on industries that require intensive investment to compete and innovate well before demand materialises (or fails to do so). In these industries, the existence of exit barriers may cause firms to become “zombies” ex post and result in significant underinvestment ex ante. We first discuss the link between the investment decisions of firms and the existence and significance of exit barriers. Then, we consider the role of mergers as an exit mechanism that promotes efficient investment and fosters competition. We conclude with a discussion about optimal merger policy.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84157538","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Cyber risk is one of the greatest threats facing any modern financial system, a result of increasing dependence on technology and the appeal of troves of personal data to well-equipped hackers. This article examines the governance of cyber risk in the Canadian banking system in the backdrop of the COVID-19 Crisis which has led to a surge in cyber attacks. It argues that the existing operational risk framework, developed by the Basel Accords, is unfit to handle the unique challenges posed by cyber risk. Cyber incidents are unlike traditional operational disruptions in both their dynamism and impact, and are not adequately captured by backward-looking proxies, such as historical losses. There is also a mismatch between the traditional risk-based supervision, which relies on annual risk rating of banks, and the quickly changing cyber profile of regulated entities. The article calls for a paradigm shift in banking regulation such that cyber resilience is set as an explicit regulatory objective for both individual firms and the system as a whole. It outlines a number of strategies which can help banks and regulators navigate and adapt to the ever-changing cyber landscape.
{"title":"Regulation of Cyber Risk in the Banking Sector: A Canadian Case Study","authors":"Maziar Peihani","doi":"10.2139/ssrn.3880115","DOIUrl":"https://doi.org/10.2139/ssrn.3880115","url":null,"abstract":"Cyber risk is one of the greatest threats facing any modern financial system, a result of increasing dependence on technology and the appeal of troves of personal data to well-equipped hackers. This article examines the governance of cyber risk in the Canadian banking system in the backdrop of the COVID-19 Crisis which has led to a surge in cyber attacks. It argues that the existing operational risk framework, developed by the Basel Accords, is unfit to handle the unique challenges posed by cyber risk. Cyber incidents are unlike traditional operational disruptions in both their dynamism and impact, and are not adequately captured by backward-looking proxies, such as historical losses. There is also a mismatch between the traditional risk-based supervision, which relies on annual risk rating of banks, and the quickly changing cyber profile of regulated entities. The article calls for a paradigm shift in banking regulation such that cyber resilience is set as an explicit regulatory objective for both individual firms and the system as a whole. It outlines a number of strategies which can help banks and regulators navigate and adapt to the ever-changing cyber landscape.","PeriodicalId":11797,"journal":{"name":"ERN: Regulation (IO) (Topic)","volume":"25 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81551757","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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