A Comparison of Government Regulation of Risk in the Financial Services and Nuclear Power Industries

In this paper we examine and compare the problem of safety and soundness regulation in two industries that have dominated the headlines in recent years—nuclear power and financial services. In both industries, a major purpose of regulation and supervision is the prevention of excessive risk taking which can result in extraordinary harm to society. While clearly important industries in their own right, we hope a side-by-side comparison sheds light on the broader policy problem. One of the most striking differences in our comparison is that the recent safety record in the nuclear power industry in the United States appears to be better than the safety record in the financial sector, as evidenced most recently by the failure and bailout of several large financial firms and the resulting global financial crisis. An important issue in addressing the adequacy of regulation and supervision is the problem of regulatory capture, or the tendency for regulated firms and their government regulators to develop mutually beneficial relationships that are harmful to the economy, public safety and people’s lives more generally. The benefits to the regulated firms may include lax supervision, protection from competition, or even government bailouts. The benefits to the regulators may be lucrative post government employment, political contributions, or favors to