FIU Law Review Volume 5 Number 1 Article 8 Fall 2009 The Subprime Crisis and the Link between Consumer Financial Protection and Systemic Risk Erik F. Gerding University of New Mexico School of Law Follow this and additional works at: https://ecollections.law.fiu.edu/lawreview Part of the Other Law Commons Online ISSN: 2643-7759 Recommended Citation Erik F. Gerding, The Subprime Crisis and the Link between Consumer Financial Protection and Systemic Risk, 5 FIU L. Rev. 93 (2009). DOI: https://dx.doi.org/10.25148/lawrev.5.1.8 This Article is brought to you for free and open access by eCollections. It has been accepted for inclusion in FIU Law Review by an authorized editor of eCollections. For more information, please contact
[email protected]. The Subprime Crisis and the Link between Consumer Financial Protection and Systemic Risk Erik F. Gerding This Article argues that the current global financial crisis, which was first called the “subprime crisis,” demonstrates the need to revisit the divi- sion between financial regulations designed to protect consumers from ex- cessively risky loans and safety-and-soundness regulations intended to pro- tect financial markets from the collapse of financial institutions. Consumer financial protection can, and must, serve a role not only in protecting indi- viduals from excessive risk, but also in protecting markets from systemic risk. Economic studies indicate it is not merely high rates of defaults on consumer loans, but also unpredictable and highly correlated defaults that create risks for both lenders and investors in asset-backed securities. Consumer financial regulations can mitigate these risks in three, non- exclusive ways: (1) by reducing the level of defaults on consumer loans, (2) by making defaults more predictable, and (3) by reducing the correlation of defaults.