A financial model can be written into regulation to enact its own assumptions

Evidence

It was even proposed that if the limit on the extension of credit to purchase stocks laid down by the Federal Reserve were to be removed for hedging by market makers on options exchanges, the Black-Scholes model would be used, performatively, to determine the quantity of stock purchases that constituted a bona fide hedge and that were therefore eligible for unrestricted credit. Had this proposal been accepted, it would have been another delightfully direct loop of performativity the Black-Scholes model deployed to make one of its assumptions a reality but the Federal Reserve rejected the idea. The Federal Reserve nevertheless permitted options market makers unrestricted use of credit for their options positions and, at least in some cases, 75 percent credit for stock bought as a hedge. — Donald MacKenzie, An Engine, Not a Camera, 742

Categorization

• XREF: Core performativity thesis instance — the model being used to define ‘a bona fide hedge’ for regulatory credit purposes is a textbook example of economics shaping its own domain, linking directly to Callon and to this book’s central argument. — connects to: Credit-risk regulation imports market-finance models developed for traded securities. — Ève Chiapello, Financialisation of Valuation, 60; Regulatory capital rules redefine banks as investor vehicles rather than funding distributors — Ève Chiapello, Financialisation of Valuation, 64; Financial theories can become true by guiding the practices they describe — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 38 (+5 more)
• QUESTION: Worth investigating whether any later derivatives regulation (e.g., portfolio margining, Basel haircuts) explicitly incorporated Black-Scholes outputs into qualifying-hedge definitions.

Broader Connections

• Basel regulations displaced bankers’ practical credit judgment with statistical risk models #exemplifies (0.85) — Ève Chiapello, Financialisation of Valuation, 63
• Market conditions moved toward the model’s assumptions partly because of the model itself #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1155