Information Gaps and Shadow Banking

This Article argues that information gaps—pockets of information that are pertinent and knowable but not currently known—are a byproduct of shadow banking and a meaningful source of systemic risk. It lays the foundation for this claim by juxtaposing the regulatory regime governing the shadow banking system with the incentives of the market participants who populate that system. Like banks, shadow banks rely heavily on short-term debt claims designed to obviate the need for the holder to engage in any meaningful information gathering or analysis. The securities laws that prevail in the capital markets, however, both presume and depend on providers of capital to perform these functions. In synthesizing insights from diverse bodies of literature and situating those understandings against the regulatory architecture, this Article provides one of the first comprehensive accounts of how the information-related incentives of equity and money claimants explain many core features of securities and banking regulation.

The Article’s main theoretical contribution is to provide a new explanation for the inherent fragility of institutions that rely on money claims. The existing literature typically focuses on either coordination problems among depositors or information asymmetries between depositors and bank managers to explain bank runs. This Article provides a third explanation for why reliance on short-term debt leads to fragility, one which complements the established paradigms. First, information gaps increase the probability of panic by increasing the range of signals that can cast doubt on whether short-term debt that market participants had been treating like “money” remain sufficiently information insensitive to merit such treatment. Second, information gaps impede the market and regulatory responses that can dampen the effects of a shock once panic takes hold. Evidence from the 2007–2009 financial crisis is consistent with the Article’s claims regarding the ways shadow banking creates information gaps and how those gaps contribute to fragility.

The Economic Foundation of the Dormant Commerce Clause

In 2015, a sharply divided Supreme Court decided a landmark dormant Commerce Clause case, Comptroller of the Treasury of Maryland v. Wynne. Wynne represents the Court’s first clear acknowledgement of the economic underpinnings of one of its main doctrinal tools for resolving tax discrimination cases, the internal consistency test. In deciding Wynne, the Court relied on economic analysis we provided in an amicus brief. This Article explains that analysis, why the majority accepted it, why the dissenters’ objections to the majority’s reasoning miss their mark, and what Wynne means for state taxation. Essential to our analysis and the Court’s decision in Wynne is the idea that states are capable of discriminating not only on an inbound basis, but also on an outbound basis, and that the Commerce Clause prohibits discrimination on either basis. To aid in explaining our position, this Article introduces the term “retentionism” as an analogue to protectionism. Whereas taxes or regulations are protectionist when they discourage outsiders from engaging in economic activities within a state, taxes or regulations are retentionist when they discourage in-state economic actors from engaging in outof-state activities. As we show, the tax struck down in Wynne was both protectionist and retentionist.