Open Access. Powered by Scholars. Published by Universities.®

Law Commons

Open Access. Powered by Scholars. Published by Universities.®

Articles 1 - 19 of 19

Full-Text Articles in Law

Why Financial Regulation Keeps Falling Short, Dan Awrey, Kathryn Judge Jan 2020

Why Financial Regulation Keeps Falling Short, Dan Awrey, Kathryn Judge

Faculty Scholarship

This article argues that there is a fundamental mismatch between the nature of finance and current approaches to financial regulation. Today’s financial system is a dynamic and complex ecosystem. For these and other reasons, policy makers and market actors regularly have only a fraction of the information that may be pertinent to decisions they are making. The processes governing financial regulation, however, implicitly assume a high degree of knowability, stability, and predictability. Through two case studies and other examples, this article examines how this mismatch undermines financial stability and other policy aims. This examination further reveals that the procedural ...


The Covid-19 Pandemic And Business Law: A Series Of Posts From The Oxford Business Law Blog, Gert-Jan Boon, Markus K. Brunnermeier, Horst Eidenmueller, Luca Enriques, Aurelio Gurrea-Martínez, Kathryn Judge, Jean-Pierre Landau, Marco Pagano, Ricardo Reis, Kristin Van Zwieten Jan 2020

The Covid-19 Pandemic And Business Law: A Series Of Posts From The Oxford Business Law Blog, Gert-Jan Boon, Markus K. Brunnermeier, Horst Eidenmueller, Luca Enriques, Aurelio Gurrea-Martínez, Kathryn Judge, Jean-Pierre Landau, Marco Pagano, Ricardo Reis, Kristin Van Zwieten

Faculty Scholarship

The COVID-19 Pandemic is the biggest challenge for the world since World War Two, warned UN Secretary General, António Guterres, on 1 April 2020. Millions of lives may be lost. The threat to our livelihoods is extreme as well. Job losses worldwide may exceed 25 million.

Legal systems are under extreme stress too. Contracts are disrupted, judicial services suspended, and insolvency procedures tested. Quarantine regulations threaten constitutional liberties. However, laws can also be a powerful tool to contain the effects of the pandemic on our lives and reduce its economic fallout. To achieve this goal, rules designed for normal times ...


The Data Standardization Challenge, Kathryn Judge, Richard Berner Jan 2019

The Data Standardization Challenge, Kathryn Judge, Richard Berner

Faculty Scholarship

Data standardization offers significant benefits for industry and regulators alike, suggesting that it should be easy. In practice, however, the process has been difficult and slow moving. Moving from an abstract incentive-based analysis to one focused on institutional detail reveals myriad frictions favoring the status quo despite foregone gains. This paper explores the benefits of and challenges confronting standardization, why it should be a top regulatory priority, and how to overcome some of the obstacles to implementation.

The paper also uses data standardization as a lens into the challenges that impede optimal financial regulation. Alongside capture and other common explanations ...


Regulation And Deregulation: The Baseline Challenge, Kathryn Judge Jan 2018

Regulation And Deregulation: The Baseline Challenge, Kathryn Judge

Faculty Scholarship

A core challenge for financial regulation is how best to address the inherent dynamism of finance. The financial system is engineered to change. Periods of stability, evolving macroeconomic conditions, and regulation are among the forces driving the constant shape shifting of finance. As a result, rules established at Time A often have a different substantive effect at Time B. And because efforts to reduce the cost of complying with regulatory burdens, commonly known as regulatory arbitrage, are among the forces driving this change, a static regulatory regime will tend to be inherently deregulatory.

Currently, the processes through which the law ...


Guarantor Of Last Resort, Kathryn Judge Jan 2018

Guarantor Of Last Resort, Kathryn Judge

Faculty Scholarship

The optimal response to a financial crisis entails addressing two, often conflicting, demands: stopping the panic and starting the clock. When short-term depositors flee, banks can be forced to sell assets at fire-sale prices, causing credit to contract and real economic activity to decline. To reduce these adverse spillover effects, policymakers routinely intervene to stop systemic runs. All too often, however, policymakers deploy stopgap measures that allow the underlying problems to fester. To promote long-term economic health, they must also ferret out the underlying problems and allocate the losses that cannot be avoided. A well-designed guarantor of last resort can ...


Investor-Driven Financial Innovation, Kathryn Judge Jan 2017

Investor-Driven Financial Innovation, Kathryn Judge

Faculty Scholarship

Financial regulations often encourage or require market participants to hold particular types of financial assets. One unintended consequence of this form of regulation is that it can spur innovation to increase the effective supply of favored assets. This Article examines when and how changes in the law prompt the spread of “investor-driven financial innovations.” Weaving together theory, recent empirical findings, and illustrations, this Article provides an overview of why investors prefer certain types of financial assets to others, how markets respond, and how the spread of investor-driven innovations can transform the structure of the financial system. This examination suggests that ...


Through The Looking Glass To A Shared Reflection: The Evolving Relationship Between Administrative Law And Financial Regulation, Gillian E. Metzger Jan 2015

Through The Looking Glass To A Shared Reflection: The Evolving Relationship Between Administrative Law And Financial Regulation, Gillian E. Metzger

Faculty Scholarship

Administrative law and financial regulation might be thought closely connected, sharing a focus on federal regulation and intertwined at key historical junctures such as the birth of the New Deal administrative state. Yet, oddly, in many ways these two fields stand today poles apart, divided not simply by their separation in law school curricula and faculty, but even more by opposite precepts and framing principles. Modern U.S. administrative law takes notice-and-comment rulemaking as the paradigmatic example of administrative action, with the goal of such regulation often being to compensate for market deficiencies. Accountability, particularly political accountability through presidential and ...


Through The Looking Glass To A Shared Reflection: The Evolving Relationship Between Administrative Law And Financial Regulation, Gillian E. Metzger Jan 2015

Through The Looking Glass To A Shared Reflection: The Evolving Relationship Between Administrative Law And Financial Regulation, Gillian E. Metzger

Faculty Scholarship

Administrative law and financial regulation have an uneasy relationship today. It was not always so. Indeed, the two were closely intertwined at the nation's birth. The Treasury Department was a major hub of early federal administration, with Alexander Hamilton crafting the first iterations of federal administrative law in his oversight of revenue generation and customs collection. One hundred and fifty years later, administrative law and financial regulation were conjoined in the New Deal's creation of the modern administrative state. This time it was James Landis, Chair of the newly formed Securities and Exchange Commission (SEC) and author of ...


Three Discount Windows, Kathryn Judge Jan 2014

Three Discount Windows, Kathryn Judge

Faculty Scholarship

It is widely assumed that the Federal Reserve is the lender of last resort in the United States and that the Fed's discount window is the primary mechanism through which it fulfills this role. Yet, when banks faced liquidity constraints during the 2007-2009 financial cfisis (the Cisis), the discount window played a relatively small role in providing banks much needed liquidity. This is not because banks forewent government-backed liquidity; rather, they sought it elsewhere. First, they increased their reliance on collateralized loans, known as advances, from the Federal Home Loan Bank System, a little-known government-sponsored enterprise that grew in ...


Market Efficiency After The Financial Crisis: It's Still A Matter Of Information Costs, Ronald J. Gilson, Reinier Kraakman Jan 2014

Market Efficiency After The Financial Crisis: It's Still A Matter Of Information Costs, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007-2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis (“ECMH”). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It ...


Market Efficiency After The Financial Crisis: It's Still A Matter Of Information Costs, Ronald J. Gilson, Reinier Kraakman Jan 2014

Market Efficiency After The Financial Crisis: It's Still A Matter Of Information Costs, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Contrary to the views of many commentators, the Efficient Capital Market Hypothesis ("ECMH"), as originally framed in financial economics, was not "disproven" by the Subprime Crisis of 2007-2008, nor has it been shown to be irrelevant to the project of regulatory reform of financial markets. To the contrary, the ECMH points to commonsense reforms in the wake of the Crisis, some of which have already been adopted. The Crisis created a lot of losers – from individual investors to pension funds and German Landesbanken – who purchased mortgage-backed securities that they did not, and perhaps could not, understand, and it cost them ...


Three Discount Windows, Kathryn Judge Jan 2013

Three Discount Windows, Kathryn Judge

Faculty Scholarship

It is widely assumed that the Federal Reserve is the lender of last resort in the United States and that the Fed’s discount window is the primary mechanism through which it fulfills this role. Yet, when banks faced liquidity constraints during the 2007–2009 financial crisis (the Crisis), the discount window played a relatively small role in providing banks much needed liquidity. This is not because banks forewent government backed liquidity; rather, they sought it elsewhere. First, they increased their reliance on collateralized loans, known as advances, from the Federal Home Loan Bank system, a little known government sponsored ...


Interbank Discipline, Kathryn Judge Jan 2013

Interbank Discipline, Kathryn Judge

Faculty Scholarship

As banking has evolved over the last three decades, banks have become increasingly interconnected. This Article draws attention to an effect of this development that has important policy ramifications yet remains largely unexamined – a dramatic rise in interbank discipline. The Article demonstrates that today's large, complex banks have financial incentives to monitor risk taking at other banks, They also have the infrastructure, competence, and information required to be fairly effective monitors and mechanisms through which they can respond when a bank changes its risk profile. Interbank discipline thus affects bank risk taking, discouraging banks from taking some types of ...


The Political Economy Of Dodd-Frank: Why Financial Reform Tends To Be Frustrated And Systemic Risk Perpetuated, John C. Coffee Jr. Jan 2012

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

Faculty Scholarship

Several commentators have argued that financial “reform” legislation enacted after a market crash is invariably flawed, results in “quack corporate governance” and “bubble laws,” and should be discouraged. This criticism has been specifically directed at both the Sarbanes-Oxley Act and the Dodd-Frank Act. This article presents a rival perspective. Investors, it argues, are naturally dispersed and poorly organized and so constitute a classic “latent group” (in Mancur Olson’s terminology). Such latent groups tend to be dominated by smaller, but more cohesive and better funded special interest groups in the competition to shape legislation and influence regulatory policy. This domination ...


Interbank Discipline, Kathryn Judge Jan 2012

Interbank Discipline, Kathryn Judge

Faculty Scholarship

As banking has evolved over the last three decades, banks have become increasingly interconnected. This Article draws attention to an effect of this development that has important policy ramifications yet remains largely unexamined – a dramatic rise in interbank discipline. The Article demonstrates that today’s large, complex banks have financial incentives to monitor risk taking at other banks, the infrastructure, competence, and information to be fairly effective monitors, and mechanisms through which they can respond when a bank changes its risk profile. This suggests that interbank discipline affects bank risk taking and merits more consideration than it has received thus ...


The Political Economy Of Dodd-Frank: Why Financial Reform Tends To Be Frustrated And Systemic Risk Perpetuated, John C. Coffee Jr. Jan 2012

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 in ...


Fragmentation Nodes: A Study In Financial Innovation, Complexity, And Systemic Risk, Kathryn Judge Jan 2012

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 Jan 2012

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 ...


Fragmentation Nodes: A Study In Financial Innovation, Complexity And Systemic Risk, Kathryn Judge Jan 2011

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

Faculty Scholarship

This Article presents 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 financial ...