Law Commons^™

Who Benefits From Corporate Tax Cuts?: Evidence From Banks And Credit Unions Around The Tcja, Edward Fox, Benjamin David Pyle

Faculty Scholarship

The TCJA of 2017 made large changes to the taxation of corporate and pass-through businesses in the U.S. Understanding the effects of these changes is complicated by the difficulty of finding control firms whose taxation was not altered by the Act. We study the effect of the TCJA on small and medium size banks using credit unions—which compete with these banks for deposits and in making loans—as a novel control group. Credit unions were not taxed both before and after the Act. Using a difference-in-difference framework, we find that an important fraction of the incidence of the tax cut goes …

A Story Of Three Bank-Regulatory Legal Systems: Contract, Financial Management Regulation, And Fiduciary Law, Tamar Frankel

Faculty Scholarship

How should banks be regulated to avoid their failure? Banks must control the risks they take with depositors' money. If depositors lose their trust in their banks, and demand their money, the banks will fail. This article describes three legal bank regulatory systems: Contract with depositors (U.S.); a mix of contract and trust law, but going towards trust (Japan), and a full trust-fiduciary law regulating banks (Israel). The article concludes that bank regulation, which limits the banks' risks and conflicts of interest, helps create trustworthy banks that serve their country best.

Reverse Regulatory Arbitrage: An Auction Approach To Regulatory Assignments, Frederick Tung, M Todd Henderson

Faculty Scholarship

In the years before the Financial Crisis, banks got to pick their regulators, engaging in a form of regulatory arbitrage that we now know was a race to the bottom. We propose to turn the tables on the banks by allowing regulators, specifically, bank examiners, to choose the banks they regulate. We call this “reverse regulatory arbitrage,” and we think it can help improve regulatory outcomes. Building on our prior work that proposes to pay bank examiners for performance — by giving them financial incentives to avoid bank failures — we argue that bank supervisory assignments should be set through …

Bank Ceos, Inside Debt Compensation, And The Global Financial Crisis, Frederick Tung, Xue Wang

Faculty Scholarship

Bank executives’ compensation has been widely identified as a culprit in the Global Financial Crisis, and reform of banker pay is high on the public policy agenda. While Congress targeted its reforms primarily at bankers’ equity-based pay incentives, empirical research fails to show any correlation between bank CEO equity incentives and bank performance in the Financial Crisis. We offer an alternative analysis, hypothesizing that bank CEOs’ inside debt incentives correlate with reduced bank risk taking and improved bank performance in the Crisis. A nascent literature shows that inside debt may dampen CEOs’ risk taking incentives. Unlike the industrial firms that …

Pay For Banker Performance: Structuring Executive Compensation For Risk Regulation, Frederick Tung

Faculty Scholarship

Excessive risk taking by firm managers did not originate with the Financial Crisis of 2007-08. Though bankers had special incentives to take big risks in the period before the Crisis, the incentive effects of equity-based compensation have been understood for some time. Among other things, equity compensation tends to induce greater risk taking by aligning managers’ risk preferences with those of equity holders. Longstanding government guaranties of bank liabilities additionally served to intensify bankers’ risk taking incentives.

I propose to ameliorate this gambler’s incentive with a new approach to compensation at the largest banks, one that explicitly accounts for the …

Bonding Bankers: Notes Toward A Governance Approach To Risk Regulation, Frederick Tung

Faculty Scholarship

Important regulatory failures have been identified in the wake of the recent financial crisis, and comprehensive regulatory reform has been much on the minds of policymakers. Reform proposals call for a number of significant changes to the scope and structure of financial regulation to address systemic risk. With banking regulation, however, the twin tools of capital requirements and external supervision seem to remain the dominant regulatory levers. In this short discussion, I introduce the contours of an important supplement to the existing approach, a governance approach that uses bank executives' compensation arrangements as a policy lever. I propose that bank …

The Great Bailout Of 2008-09, Frederick Tung

Faculty Scholarship

My task today is to talk about the financial crisis. I only have a short time to talk, so rather than try to give you a comprehensive analysis of events, I'm going to offer some of my own idiosyncratic takes on what has been happening. In addition, I will introduce my own small reform proposal for regulating bank risk taking. So, I'll give you a little bit of news, a little bit of weather, a little bit of everything.

Where are we now? Let us begin with a statement Henry Paulson made six months ago while Bear Steams was getting …

How Law Affects Lending, Rainer F.H. Haselmann, Katharina Pistor, Vikrant Vig

Faculty Scholarship

The paper explores how legal change affects lending behavior of banks in twelve transition economies of Central and Eastern Europe. In contrast to previous studies, we use bank level rather than aggregate data, which allows us to control for country level heterogeneity and analyze the effect of legal change on different types of lenders. Using a differences-in-differences methodology to analyze the within country variation of changes in creditor rights protection, we find that the credit supplied by banks increases subsequent to legal change. Further, we show that collateral law matters more for credit market development than bankruptcy law. We also …

Bank Powers To Sell Annuities, Tamar Frankel

Faculty Scholarship

The conflict over turf between the banking industry and the insurance agents has heated up again. In the 1993 case Variable Annuity Life Ins. Co. v. Clarke, ¹ the Fifth Circuit held banks have no power to sell fixed annuities issued by insurance companies in cities with more than 5,000 inhabitants. On June 6, 1994, the Supreme Court granted certiorari to review the decision. ³ Both the Clinton Administration and members of Congress are considering steps toward resolving this issue. Concerned that the flight of high-quality borrowers from the banking system has rendered bank lending increasingly risky, the Comptroller of …

The Dual State - Federal Regulation Of Financial Institutions - A Policy Proposal, Tamar Frankel

Faculty Scholarship

In 1983 South Dakota passed an Act permitting its chartered banks to sell and underwrite insurance.¹ The issue that I address is whether states should have the power to pass such a law. I am not concerned here with interpretation of positive law but with public policy implications.

The issue is a matter of congressional policy. Like most financial intermediaries banks are regulated by both state and federal laws,² but it is clear that the federal government has the power to preempt state laws that regulate banks. Therefore, whether South Dakota can pass the statute is not a …

Developments In Banking Law 1982, Dennis S. Aronowitz, Robert Volk

Faculty Scholarship

In 1982, the nation's depository institutions continued to cope with a difficult economic environment. Although the high interest rates of the early part of the year began a slow decline in the fall, commercial banks and thrift institutions continued to face stiff competition from alternative investment instruments for the depositor's dollar. Savings banks and savings and loan associations continued to have trouble remaining solvent in a difficult time. In 1982 both the Federal Deposit Insurance Corporation (FDIC) and the Federal Home Loan Bank Board (FHLBB) arranged a record number of mergers and acquisitions involving failing institutions.

Developments In Banking Law: 1980-81, Dennis S. Aronowitz, Robert Volk

Faculty Scholarship

The years 1980 and 1981 were marked by a continuation and acceleration of change in the nation's financial institutions in general and in depository institutions in particular. Until recently, the banking and thrift industries have been unique in possessing the capacity to thrive in a changing economy without changing very significantly themselves. This phenomenon was largely attributable to a regulatory environment that protected depository institutions, minimizing competition from unregulated financial entities and imposing a form of organization that permitted institutions to thrive while conducting their activities in traditional ways. The advent of stubbornly high inflation and historically high interest rates …