Brookings-Wharton Papers on Financial Services

Brookings-Wharton Papers on Financial Services 2003 (2003) 273-310

Efficient Confidentiality for Privacy, Security, and Confidential Business Information

Peter P. Swire

THIS PAPER IS, IN PART, about the efficiency of privacy protection within financial conglomerates. Addressing that topic, however, requires the analysis to go broader in three respects. First, the issues affecting privacy in financial conglomerates are fundamentally similar to privacy issues for other industries. Second, privacy issues have been so contentious in recent years that it helps our understanding to broaden the discussion to other settings where confidentiality may be appropriate. Third, the claims for the efficiency or inefficiency of financial privacy protections require a more probing examination of what the concept of "efficiency" means as applied to privacy and other confidentiality issues.

The paper begins with a brief background on recent developments in financial privacy. It then contrasts the history of widespread confidentiality in banking, a history that suggests the efficiency of the practice, with economists' views that confidentiality often makes a market less competitive and less efficient. To reconcile the contrasting stories, the paper then moves away from the privacy debate to analyze the efficiency of confidentiality in other settings. Notably, many people believe that confidentiality [End Page 273] aids efficiency in connection with security, confidential business information, account numbers, and other key data that can result in identity theft. The reasons supporting confidentiality in these other settings make it easier to see when confidentiality may be efficient in the handling of personal information. The paper then discusses a new study that gives evidence of a link between higher consumer trust in privacy and willingness to participate in other financial services. Based on the analysis, it proposes a general approach for assessing the efficiency of confidentiality. In doing so, it also highlights the particular ways in which economists have systematically given less weight to privacy protection than academics trained in other disciplines.

On the level of methodology, this paper specifically targets arguments about confidentiality from two groups that, in my experience, are most skeptical of privacy claims: economists and a regulated industry that prefers not to face greater regulation. By making arguments within the discourse of financial services and economics, I am not claiming that this is the best or the only approach to assessing the importance and desirability of privacy protections. Scholars trained in other disciplines have vigorously argued for privacy protection. These scholars have argued, for instance, that privacy protections foster autonomy, ¹ develop and maintain desirable social norms, ² encourage democracy, ³ prevent tyranny, ⁴ and serve other worthy goals. ⁵ This paper does not attempt to umpire among the competing perspectives on privacy protection. Instead, it primarily [End Page 274] explores ways in which economic analysis to date has likely, in its own terms, undervalued the importance of privacy protection. ⁶ It then seeks to place the economic analysis of privacy and confidentiality more clearly within the broader debates about those important topics.

Bank Confidentiality Versus Economic Theory:
Two Contrasting Stories

For a number of years I have done research on the topic of financial privacy as a lens for exploring more general issues of privacy, data protection, and information technology. ⁷ Along with this academic research, I have had the privilege of participating more directly in the development of law and policy in the area of financial privacy. From March 1999 until January 2001, I served as the Clinton administration's chief counselor for privacy in the U.S. Office of Management and Budget. In that role, I participated in what was likely the most intense political debate in U.S. history about the rules for financial privacy. In May 1999 President Clinton announced his support for significant financial privacy legislation, in what I believe was the first event by a U.S. president that focused on the topic of information privacy. That July the House of Representatives passed the Financial Services Reform Bill, with privacy as the most hotly contested issue in the floor debate. That November President Clinton signed the Financial Modernization Bill, after...