Lindsay Sain Jones (Terry College of Business, University of Georgia) has posted Nonbanks and the Social Contract (103 North Carolina Law Review (forthcoming 2024)) on SSRN. Here is the abstract:
Traced back to the Age of Enlightenment, social contract theory rationalizes civil authority by asserting that individuals consent to this authority in exchange for protection or other benefits. In the context of banking regulation, scholars have applied the theory and posited that banks and the government exchange mutually beneficial promises. From this agreement, the government protects banks and in return, banks provide a reliable banking system that allows the economy to flourish. This Article evaluates this purported contract and then compares it with the benefits flowing to and from nonbank financial institutions, which provide an increasing share of financial services in the U.S..
The primary assertion of this Article is that an implicit contract between such nonbanks and society now also exists, but this contract is unbalanced. As the financial crisis demonstrated, nonbanks pose systemic risks to our financial system and have thus received the benefits of federal safety nets such as liquidity assistance, loan insurance, and loan purchases. Yet, they are subject to less oversight and fewer duties than banks. Designations as systemically important financial institutions (SIFIs) had the potential to bring some balance to this social contract by imposing heightened prudential standards on certain nonbanks, but they have yet to do so. Due to de-designations, shifting standards, and litigation, no entities are currently designated as systemically important. Recognizing this continuing asymmetry, this Article considers alternatives for balancing the contract between nonbanks and society.
