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Deterring financial crime by Too Big To Jail Banks – MSc Dissertation

Category : Uncategorized · by Sep 14th, 2014

I just submitted the dissertation component of UCL’s MSc Economic Policy course. I researched how the existence of Too Big To Jail banks changes the microeconomics of financial crime prosecution. By modeling prosecutorial discretion in charging corporations versus their mangers, the dissertation showed that unless managers face a credible threat of incarceration for criminal behavior, authorities will be unable to optimally deter financial criminality by and within financial institutions.

I am currently working on adapting the two microeconomic models in this dissertation into a pair of economics articles. The abstract of my full dissertation is below. Please email me at nickwerle[atgmail] if you would like a copy of my research.

Deterring Financial Crime in the Age of Too Big To Jail Banks

By Nick Werle

In the United States’ legal system, prosecutors wield immense discretion in deciding how to resolve criminal cases. In cases of corporate crime, their ability to charge either a firm or its employees broadens this discretion substantially. Earlier papers in the economics of crime have studied how using corporate and individual liability effects deterrence, arguing that authorities can force firms to fully internalize the costs of their criminality with fines. However, the existence of large firms that are “Too Big To Fail” introduces important new constraints on prosecutorial decision-making, since the government is loathe to impose sanctions that might damage these systemically important firms. This study explores how the “Too Big To Jail” (TBTJ) problem complicates prosecutorial strategy by imposing an upper limit on credible threats of punishment for some firms. The TBTJ problem is particularly acute in cases of financial crime by and within large financial institutions, because if criminal sanctions against a large, interconnected bank produces a liquidity shortfall, it could trigger a crisis. This paper shows that if a bank is TBTJ, in the absence of a strong individual liability regime that includes a credible threat of incarceration, crime may be profitable for the firm, even if it knows it may face prosecution. Despite widespread financial crime in the wake of the global financial crisis, many important financial crime prosecutions in the USA have failed to charge individuals, and no bank employees have faced prison time. This paper offers a theoretical argument for instituting a stronger individual liability regime for financial crimes by employees of TBTJ banks by extending a common framework for modeling corporate crime control.

I could not have completed this dissertation without the support of the Marshall Aid Commemoration Commission and my supervisor, Dr. Cloda Jenkins.


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