Sunsetting as an adaptive strategy

Abstract

Major financial legislation is invariably enacted in the wake of a financial crisis. However, legislating following a crisis is hazardous because information is scarce regarding causes of the crisis, let alone what would be an appropriate response. Compounding the lack of information, crisis-driven legislation is sticky, but financial markets are dynamically innovative, which can undermine the efficacy of regulation. As a result, it is foreseeable that such legislation will contain at least some provisions that are inapt or inadequate or, more often, have consequences that are not well understood or even knowable. This article advocates the use of sunsetting as a mechanism for mitigating the potentially adverse consequences of crisis-driven financial legislation. With sunsetting, after a fixed time span, legislation and its implementing regulation must be reenacted to remain in force. This approach has parallels in evolutionary biology, in which a central issue is the ability to adapt to changing environments. Sunsetting does not mean simply discarding (or reenacting) existing regulations, but revisiting them and improving them, much as mutation and recombination do in the evolutionary process.