Liability of financial regulators: Defensive conduct or careful supervision?

Dijkstra, Robert J
September 2009
Journal of Banking Regulation;Sep2009, Vol. 10 Issue 4, p269
Academic Journal
Liability of financial regulators is a controversial topic in Europe. Some countries have statutory protections in place to protect their financial regulators from being sued, while other countries are submitting their financial regulators to normal liability rules. The main argument for protection can be found in the chilling effect the threat of tort law could have on the performance of financial regulators. On the other hand, the preventive effect of tort law is considered one of the most important arguments in favour of holding financial regulators liable. In order to understand which of these two arguments is valid, I examine the impact of liability rules on the behaviour of Dutch financial regulators by using a positive economic analysis. The basic economic model of regulator liability suggests that tort law gives financial regulators incentives to take adequate care in performing their assigned tasks. This model, however, is not quite accurate. When taking into account several specific characteristics of the context in which the Dutch financial regulators operate, it becomes clear that the current liability regime in the Netherlands does not give proper incentives for taking adequate care. On the contrary, with the existence of a deposit guarantee system, safeguard clauses and the possibility for insurance, under deterrence is more likely to occur. This also means that the threat of liability leading to defensive conduct is unlikely. Thus, from a Law and Economics perspective, neither of the mentioned arguments seems to be valid in the case of Dutch financial regulators. Because financial regulators in other European countries have several of the mentioned characteristics in common, the outcome of this analysis may also apply to them.



Other Topics