Secured Transactions and Financial Stability : Regulatory Challenges

Although secured transactions traditionally are regulated to protect transacting parties and to make the transactions themselves more efficient, the financial crisis has revealed that regulation should also protect the stability of the financial system. This raises numerous future challenges. For example, regulation to control moral hazard in secured loan origination faces the challenge that the relevant market failure is less likely to be asymmetric information than mutual misinformation. Because of its impact on home ownership, the regulation of collateralization levels and interconnectedness faces fundamentally different challenges than those underlying the (technically) analogous post-Depression regulation of margin lending. Non-traditional secured transactions, including securitization and other forms of structured finance, raise innovative regulatory challenges concerning complexity and the limits of disclosure. The potential for the widening gap between the rich and the poor to undermine stability also raises the challenge (which is itself partly informed by the UCC's innovative disentanglement of commercial and property law) of whether to recognize de facto rights, in order to enable the poor to use their homes and other commonly held assets as collateral to raise capital