Regulatory Agencies and the Inclusion Trilemma

Abstract

Regardless of economic cycles, financial regulation can be understood to be bound by an uncomfortable social policy trilemma. When faced with 1) providing market integrity, 2) fostering innovation, and 3) enabling financial inclusion, regulators have long been able to achieve, at best, only two of these three goals. Often the result of this trilemma are choices made in the name of consumer and investor protection, or innovation, that indirectly promote, enable or exacerbate wealth inequality by redlining capital markets or exposing the vulnerable to undue risk. In this article, I explain this trilemma and argue that addressing it will require novel innovations – from incorporating inclusion and innovation formally into regulatory mandates to upgrading existing offices of innovation, and creating offices of financial inclusion, to better navigate the tradeoffs inherent in the trilemma.