Financial Reform and Venture Capital (Jaideep Venkatesan)

Last month, President Obama unveiled his plan for financial regulation. The administration's
draft included a provision to bring "private pools of capital" under regulation, potentially subjecting venture capital funds to disclosure requirements, margin and reserve limitations, and other regulations that govern traditional banks and bank alternatives.

Financial reform bringing "shadow banking" under regulation is essential to prevent a replay of the financial crisis of 2008 that froze credit and ushered in the current recession/depression. However, it is an open question as to whether venture capital funds function in a manner similar to banks and pose the same systemic risks if left unregulated.

The National Venture Capital Association wasted no time in opposing the financial regulatory plan. The Association made the boilerplate opposition to financial regulation typical of the Washington Consensus. Given the current plunge in Venture capital funding, poorly designed regulation can exacerbate the economic downturn. Nonetheless, the current crisis requires a financial overhaul, and given the importance of venture capital funding to technological innovation and the economy, it should not be left out of the new financial regulatory regime.