Regulating Private Financial Institutions: How to Kill the Goose That Laid the Golden Eggs

Following the 2008 financial crisis, private financial institutions such as hedge funds and private equity funds have been faced with multiple calls for their regulation, both for consumer protection and systemic reasons. Various proposals for a new regulation have been made and are currently under discussion. The hedge fund community is also open to reasonable regulations. In this paper, we discuss some of the key aspects of the SEC and the European Union proposals and argue that both of them suffer from severe shortcomings. A revisited version of this paper was published in the Journal of Financial Transformation, volume 27 (2009).