Aaron M. Levine is an associate at Sullivan & Cromwell LLP and Joshua C. Macey is a law clerk for Judge J. Harvie Wilkinson III. This post is based on their recent Note, recently published in the Yale Law Journal.
In this Note, recently published in the Yale Law Journal, we show that Dodd Frank’s compliance costs have furthered the Act’s goal of reducing systemic risk. Specifically, our article analyzes the all of the spinoffs and divestitures that have occurred at eleven systemically important financial institutions (SIFIs) since Dodd-Frank went into effect in 2010 and documents the extent to which the Act’s compliance costs have led SIFIs to shed business lines of their own accord in order to reduce the costs of complying with Dodd Frank. The evidence reveals that regulators can adjust Dodd-Frank’s costs in response to the perceived riskiness of specific business units, and that SIFIs can respond to these adjustments by divesting the business lines that caused their compliance costs to increase—that is, SIFIs’ riskiest lines of business. In this way, Dodd-Frank has had an effect analogous to that of a Pigouvian tax. We call this a “Pigouvian regulation.” Our analysis thus challenges scholars who bemoan the Act’s “costly and burdensome regulations” for “failing to address key factors widely acknowledged to have contributed to the financial crisis.”