Exploring the Physical Properties of Regulatory Ecosystems – Professors Daniel Martin Katz + Michael J Bommarito

The rate at which US Companies cite regulations as an obstacle has quadrupled over the last 20 years (via Quartz)

“Michael Bommarito II and Daniel Martin Katz, legal scholars at the Illinois Institute of Technology, have tried to measure the growth of regulation by analyzing more than 160,000 corporate annual reports, or 10-K filings, at the US Securities and Exchange Commission. In a pre-print paper released Dec. 29, the authors find that the average number of regulatory references in any one filing increased from fewer than eight in 1995 to almost 32 in 2016. The average number of different laws cited in each filing more than doubled over the same period.”

Three and a Half Degrees of Separation (via Facebook Research)

Starting with the original Milgram research in the 1960’s to the Dodds, Muhamad & Watts (2003) paper in Science, the exploration of the social distance between individuals in society has been a topic of interest to many scientists.  This new release from researchers at Facebook highlights that social distance is indeed declining.  For those who might be interested – I detail in these slides and these slides the history of the small world research.

Using Technology and System Design to Improve the Dodd-Frank Resolution Planning Requirement (+ Better Manage Complexity)

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This past week, I had the pleasure of participating in a half day closed door session with about ~40-50 folks from the financial services industry including several of the world’s finest law firms, representatives from SIFI and non-SIFI financial institutions as well as folks from IBM Watson and LegalOnRamp (a Watson eco-system partner).

The specific subject was RRP – the resolution planning / living wills requirement under Dodd Frank.  Former Congressman Barney Frank provided opening remarks and joined the group for the balance of the half day session.  Paul Lippe and I discussed our recent paper on Resolution Planning that was published in Banking Perspective (The Journal of The Clearing House).

As we argue in the paper, the ‘too big to fail argument’ is not really that intellectually forceful.  The question – properly posed – is what to do about complexity and the management of complex systems.  The complex and interdependent nature of the banking ecosystem is the feature that really challenges efforts to develop robust regulatory / management structures.  This would be true even if existing financial institutions were made smaller.

Our conversation was about how to use technology and system redesign to confront and manage wide scale complexity.  The resolution planning challenge should not just be focused upon clearing the existing regulatory hurdle but actually can be an opportunity for organizations to build better financial/legal information infrastructure (ultimately leading to an internet of contracts or more broadly an internet of legal things).  In building a better financial/legal information infrastructure, banks will be better positioned to manage/properly price risk.