Clearinghouse Overconfidence

California Law Review

Volume 101 | Issue 6 Article 3

12-1-2013

Clearinghouse Overconfidence

Mark J. Roe

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Mark J. Roe, Clearinghouse Overconfidence, 101 Cal. L. Rev. 1641 (2013). Available at: http://scholarship.law.berkeley.edu/californialawreview/vol101/iss6/3

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Clearinghouse Overconfidence

Mark J. Roe*

Regulatory reaction to the 2008–2009 financial crisis focused on complex financial instruments that deepened the crisis. A consensus emerged that these risky financial instruments should move through safe, strong clearinghouses, which would be bulwarks against systemic risk, and that the destructive impact of the failures during the crisis of AIG, Lehman Brothers, and the Reserve Primary Fund could have been softened or eliminated had strong clearinghouses been in place. Via the Dodd-Frank Wall Street Reform Act, Congress instructed regulators to construct clearinghouses through which these risky financial instruments would trade and settle. Clearinghouses could cut financial risk, reduce contagion, and halt a local financial problem before it becomes an economy-wide crisis. But clearinghouses are weaker bulwarks against financial contagion, financial panic, and systemic risk than is commonly thought. They may well be unable to defend the economy against financial stress such as that of the 2008–2009 crisis. Although they are efficient financial platforms in ordinary times, they do little to reduce systemic risk in crisis times. They generally do not reduce the core risk targeted—that the failure of a financial firm will...