2015 Articles

The Systemic Risk Paradox

Chang, Felix B.

Consolidation in the financial industry threatens competition and increases systemic risk. Recently, banks have seen both high-profile mergers and spectacular failures, prompting a flurry of regulatory responses. Yet consolidation has not been as closely scrutinized for clearinghouses, which facilitate trading in securities and derivatives products. These nonbank intermediaries can be thought of as middlemen who collect deposits to ensure that each buyer and seller has the wherewithal to uphold its end of the deal. Clearinghouses mitigate the credit risks that buyers and sellers would face if they dealt directly with each other.
Yet here lies the dilemma: large clearinghouses reduce credit risk, but they heighten systemic risk since the collapse of one such entity threatens the entire financial system. While regulators have tackled the systemic risks posed by large banks, the systemic risks of these nonbank intermediaries have received less attention. In fact, financial reform has spurred clearinghouse growth and consolidation.
This Article examines the paradoxical treatment of regulators toward the systemic risks of clearinghouses and banks. It explores two fundamental questions: Why does the paradox exist, and who benefits from it? This Article borrows from antitrust to offer a framework for ensuring that the entities that control a large clearinghouse (large, heavily regulated banks) do not abuse that clearinghouse’s market dominance.