Law Commons^™

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 …

The Goldilocks Approach: Financial Risk And Staged Regulation, Charles K. Whitehead

Cornell Law Faculty Publications

Financial firms engage in a wide range of private conduct. New rules that address financial risk can regulate elements of that conduct but not all conduct or all the factors that affect conduct. There is, therefore, a real concern that new regulation will have unanticipated consequences, particularly in a system as complex as the financial markets. The result may be new risks or a shift in risk taking away from regulated conduct — responses that regulators can anticipate but may not be able to accurately predict or control.

This Article cautions against the rush to adopt new financial risk regulation …

That Which We Call A Bank: Revisiting The History Of Bank Holding Company Regulations In The United States, Saule T. Omarova, Tahyar E. Margaret

Cornell Law Faculty Publications

This Article does not purport to present an exhaustive and detailed analysis of the entire political or economic history of bank holding company regulation in the United States. Rather, its goal is to examine one particular aspect of that history-the evolution of the BHCA definition of "bank" and the principal exemptions from that definition. Incomplete as it may be, this story highlights some of the key economic, social and political factors that shaped the current institutional structure of the U.S. financial services market and regulation. Without a thorough understanding of the genesis of that structure, it is difficult to envision …

The Political Economy Of Dodd-Frank: Why Financial Reform Tends To Be Frustrated And Systemic Risk Perpetuated, John C. Coffee Jr.

Faculty Scholarship

A good crisis should never go to waste. In the world of financial regulation, experience has shown – since at least the time of the South Sea Bubble three hundred years ago – that only after a catastrophic market collapse can legislators and regulators overcome the resistance of the financial community and adopt comprehensive "re-form" legislation. U.S. financial history both confirms and conforms to this generalization. The Securities Act of 1933 and the Securities Exchange Act of 1934 were the product of the 1929 stock-market crash and the Great Depression, with their enactment following the inauguration of President Franklin Roosevelt …

A Dialogue On The Costs And Benefits Of Automatic Stays For Derivatives And Repurchase Agreements, Darrell Duffie, David A. Skeel Jr.

All Faculty Scholarship

For nearly two years, the two of us have had a running discussion of the costs and benefits of automatic stays in bankruptcy for qualified financial contracts (QFCs) such as derivatives and repurchase agreements, particularly those held by systemically important major dealer banks. Under current U.S. bankruptcy law, these contracts are exempted from the automatic stay. The advantages and disadvantages of this treatment have been a matter of significant debate for the past decade, particularly since the 2008 crisis.

After some background on AFCs and automatic stays, we provide our joint analysis of the costs and benefits of stays on …

Fragmentation Nodes: A Study In Financial Innovation, Complexity, And Systemic Risk, Kathryn Judge

Faculty Scholarship

This Article resents a case study in how complexity arising from the evolution and proliferation of a financial innovation can increase systemic risk. The subject of the case study is the securitization of home loans, an innovation which played a critical and still not fully understood role in the 2007-2009 financial crisis. The Article introduces the term "fragmentation node" for these transaction structures, and it shows how specific sources of complexity inherent in fragmentation nodes limited transparency and flexibility in ways that undermined the stability of the financial system. In addition to shedding new light on the processes through which …

Recoupment Under Dodd-Frank: Punishing Financial Executives And Perpetuating "Too Big To Fail", Joshua Mitts

Faculty Scholarship

In July 2011, the Federal Deposit Insurance Corporation (FDIC) promulgated new rules implementing Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules define a cause of action to recoup compensation paid to senior executives and directors of failed nonbank financial institutions placed into the FDIC's "orderly liquidation authority" receivership. An action for recoupment is based on a negligence theory of liability, but it does not require establishing that an executive's conduct caused the financial institution any harm. The rules presume liability merely for having held executive responsibility prior to the firm entering receivership. The executive …