Law Commons^™

Commissioning The Consumer Financial Protection Bureau, Jolina C. Cuaresma

Jolina C. Cuaresma

Regulating Fintech, William Magnuson

William J. Magnuson

The financial crisis of 2008 has led to dramatic changes in the way that finance is regulated: the Dodd-Frank Act imposed broad and systemic regulation on the industry on a level not seen since the New Deal. But the financial regulatory reforms enacted since the crisis have been premised on an outdated idea of what financial services look like and how they are provided. Regulation has failed to take into account the rise of financial technology (or “fintech”) firms and the fundamental changes they have ushered in on a variety of fronts, from the way that banking works, to the …

Reframing Financial Regulation, Charles K. Whitehead

Charles K Whitehead

Financial regulation today is largely framed by traditional business categories. The financial markets, however, have begun to bypass those categories, principally over the last thirty years. Chief among the changes has been convergence in the products and services offered by traditional intermediaries and new market entrants, as well as a shift in capital-raising and risk-bearing from traditional intermediation to the capital markets. The result has been the reintroduction of old problems addressed by (but now beyond the reach of) current regulation, and the rise of new problems that reflect change in how capital and financial risk can now be managed …

The Volcker Rule And Evolving Financial Markets, Charles K. Whitehead

Charles K Whitehead

The Volcker Rule prohibits proprietary trading by banking entities - in effect, reintroducing to the financial markets a substantial portion of the Glass-Steagall Act’s static divide between banks and securities firms. This Article argues that the Glass-Steagall model is a fixture of the past - a financial Maginot Line within an evolving financial system. To be effective, new financial regulation must reflect new relationships in the marketplace. For the Volcker Rule, those relationships include a growing reliance by banks on new market participants to conduct traditional banking functions. Proprietary trading has moved to less-regulated businesses, in many cases, to hedge …

Managing Regulatory Arbitrage: An Alternative To Harmonization, Annelise Riles

Annelise Riles

This policy-oriented article argues for deploying conflict of laws doctrines as a tool of coordination in international financial governance.

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

Saule T. Omarova

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 …

Risks, Rules, And Institutions: A Process For Reforming Financial Regulation, Saule Omarova, Adam Feibelman

Saule T. Omarova

It is fair to say that reforming the regulation of the financial sector is currently one of the most hotly debated issues on the policymaking agenda. Proposals for such reform are proliferating, and the official sector appears committed to adopting at least some meaningful reforms in the near-term. Broadly speaking, this movement toward regulatory reform emphasizes the need for structural reforms, outlines specific rules and regulations targeting primarily the perceived causes of the current crisis, and is carried along by a strong sense of the moment. Rather than add to the body of institutional and substantive proposals, this Article articulates …

Bretton Woods 1.0: A Constructive Retrieval For Sustainable Finance, Robert Hockett

Robert C. Hockett

Global trade imbalance and domestic financial fragility are intimately related. When a nation runs persistently massive current account deficits to maintain global liquidity as has the United States now for decades, its central bank effectively relinquishes exchange rate flexibility to become a de facto central bank to the world. That in turn prevents the bank from playing its essential credit-modulatory role at home, at least absent strict capital controls that are difficult to administer and have long been taboo. And this can in turn render credit-fueled asset price bubbles and busts all but impossible to prevent, irrespective of the nation's …

Regulation Of Over-The-Counter Derivatives: A Comparative Study Of Proposals In Singapore And Hong Kong, Chao-Hung Christopher Chen

Christopher Chao-hung CHEN

This chapter identifies some of the potential legal and policy issues involved in the future regulation of over-the-counter (OTC) derivatives. First, regulators must be cautious in the regulation and solvency of some mammoth clearing- houses. Second, Singapore and Hong Kong both face challenges in the areas of global regulatory cooperation and extra-territorial regulatory effects. Third, the exact scope of a clearing obligation determines whether there is any regulatory competition or room for regulatory arbitrage in the future. Fourth, there are legal definition problems with the term ‘derivative’ and its sub-categories that must be addressed. Fifth, there are potential privacy and …

Objectives-Based Twin-Peaks Financial Regulation In Hong Kong, Bryane Michael, Say Goo, Dariusz Wojick

Bryane Michael (bryane.michael@stcatz.ox.ac.uk)

Objectives-based legislation – or laws which focus on achieving particular and concrete outcomes – has become a new and important tool that financial sector regulators use to tackle large and varied financial system risks. Yet, objectives-based legislation – and the frequent principles-based regulation underpinned by such legislation – represents a stark departure from traditional ways of legislating. In this paper, we describe the problems and prospects of implementing objectives-based financial regulation in Hong Kong – in the form of a Twin Peaks regulatory structure. A focus on the objectives of achieving financial market stability and proper market conduct would require …

Judicial Inactivitism In Protecting Financial Consumer Against Predatory Sale Of Retail Structured Products: A Reflection From Retail Structured Notes Lawsuits In Taiwan, Chao-Hung Chen

Christopher Chao-hung CHEN

This article analyzes 310 structured note lawsuits in Taiwan between 2000 and 2013 to examine courts’ attitude in dealing with claims of misselling retail structured notes. We find that courts were generally not favorable to retail investors. This provides a contrast with the financial regulator’s efforts to improve financial consumer protection since 2008. By examining plaintiffs’ key arguments and courts’ rulings, we find that it was difficult for investors to fulfill their burden of proof and courts were reluctant to award remedies when investors did sign on a contractual document confirming his knowledge on a few matters. While regulators are …

Dodd-Frank Regulators, Cost-Benefit Analysis, And Agency Capture, Paul Rose, Christopher J. Walker

Christopher J. Walker

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has raised the stakes for financial regulation by requiring more than twenty federal agencies to promulgate nearly 400 new rules. Scholars, regulated entities, Congress, courts, and the agencies themselves have all recognized — even before Dodd-Frank — the lack of rigorous cost-benefit analysis in the context of financial rulemaking. The D.C. Circuit has struck down several financial regulations because of inadequate cost-benefit analysis, with three more challenges to be decided this summer. Members of Congress have introduced legislation to address this problem, including a call for the President to intervene …

The Importance Of Cost-Benefit Analysis In Financial Regulation, Paul Rose, Christopher J. Walker

Christopher J. Walker

This report reviews the role, history, and application of cost-benefit analysis in rulemaking by financial services regulators.

For more than three decades — under both Democratic and Republican administrations — cost-benefit analysis has been a fundamental tool of effective regulation. There has been strong bipartisan support for ensuring regulators maximize the benefits of proposed regulations while implementing them in the most cost-effective manner possible. In short, it is both the right thing to do and the required thing to do.

Through the use of cost-benefit analysis in financial services regulation, regulators can determine if their proposals will actually work to …

Transaction Cost-Benefit Analysis, With Applications To Financial Regulation, D. Bruce Johnsen

D. Bruce Johnsen

As Coase convincingly showed, transaction costs inhibit the ability of market participants to achieve first-best outcomes. This paper proposes a novel and relatively simple alternative to traditional cost-benefit analysis when regulated parties face sufficiently low transaction costs that they can bargain directly or rely on competitive markets to set efficient terms of trade. In these settings, the only informational burdens financial market regulators need bear to assess corrective rules is to identify the relevant parties, the “good” they hope to exchange, and the transaction costs that inhibit them from maximizing joint gains from trade. A rule is justified only if …

On Duopoly And Compensation Games In The Credit Rating Industry, Robert J. Rhee

Robert Rhee

Credit rating agencies are important institutions of the global capital markets. If they had performed properly, the financial crisis of 2008–2009 would not have occurred, and the course of world history would have been different. There is a near universal consensus that reform is needed, but none as to the best approach. The problem has not been solved. This Article offers the simplest fix proposed thus far, and it is contrarian. Unlike other reform proposals, this Article accepts the central role of rating agencies in the regulation of bond investments, the realities of a duopoly, and the issuer-pay model of …

On The Theoretical Foundations For Regulating Financial Markets, Katharina Pistor

Katharina Pistor

How we think about financial markets determines how we regulate them. Since the 1970s modern finance theory has shaped how we think about and regulate financial markets. It is based on the notion that markets are or can be made (more) efficient. Financial markets have been deregulated when they were thought to achieve efficient outcomes on their own; and regulation was designed to lend crutches to them when it appeared that they needed support. While modern finance theory has suffered some setbacks in the aftermath of the global crisis, defenders hold that improving market efficiency should still be the overriding …

The Fed’S New Model Of Supervision For “Large Complex Banking Organizations”: Coordinated Risk-Based Supervision Of Financial Multinationals For International Financial Stability, Cynthia C. Lichtenstein

Cynthia C. Lichtenstein

Large internationally active financial institutions, in particular multinational banks, have the capacity to create profound disturbances in the globalized financial markets in the event of failure. For that reason, these entities are supervised and examined in a manner that is completely different than the ordinary business corporation. This piece describes the new methodology that has been developed by the United States' central bank, the Board of Governors of the Federal Reserve System or "the Fed" for short, since 1995, for examining what the Fed calls "large complex banking organizations" or LBCOs and indicates how the system in fact carries out …

Beyond Macro-Prudential Regulation: Three Ways Of Thinking About Financial Crisis, Regulation And Reform, Tamara Lothian

Tamara Lothian

This paper considers the debate about the "macro-prudential regulation" of finance in the context of a broader view of the relation of finance to the real economy. Five ideas are central to the argument. The first idea is that the two dominant families of ideas about finance and its regulation share a failure of institutional imagination. Neoclassical economists blame localized market and regulatory failures for the troubles of finance. Keynesians invoke the way in which the money economy may amplify cycles of despondency and euphoria. Neither current of thought recognizes that the institutions of finance in particular, and of the …

American Finance And American Democracy: Towards An Institutionalist "Law And Economics", Tamara Lothian

Tamara Lothian

This article reconsiders the financial and economic crisis of 2007-2009 and the present debate about the regulation of finance in the light of a vision of how finance can better serve the American economy and American Democracy. The central claim is that regulation as conventionally understood cannot adequately redress the problems, and seize the opportunities, revealed by the crisis. We should approach financial regulation as the first step in a series of institutional innovations designed to put finance more effectively at the service of the real economy (financial deepening) while broadening economic opportunity in the country (financial democratization). I develop …

Reforming The Residential Mortgage-Backed Securities Market, David J. Reiss

David J Reiss

This essay is a lightly-edited version of a talk given at the “Federal Housing Finance Policy, Secondary Mortgage Market Issues: Causes and Cures, Secondary Mortgage Market Reform” symposium at Hamline University School of Law. The issues that we are struggling with now are, in many ways, the equivalent of the issues that we struggled with during the Great Depression: what should housing policy look like and what decisions should be made in the next five years or so to bring us from crisis to stability? In all likelihood our answer to this question will define the housing market for generations. …

Consumer Protection Out Of The Shadows Of Shadow Banking: The Role Of The Consumer Financial Protection Bureau, David J. Reiss

David J Reiss

Consumer protection remains the stepchild of financial regulation. Notwithstanding the fact that the economic doldrums we find ourselves in originated in the under-regulated subprime mortgage sector, relatively few academic commentators focus on the role that consumer protection can play in reducing such risks as well as in restoring the balance between consumer and producer in the financial markets. This essay suggests that consumer protection regulation has an important role to play in the regulatory structure of the shadow banking sector.

This essay does four things. First, it describes the role of shadow banking in the residential mortgage market—the shadow mortgage …

Regulation Of Over-The-Counter Derivatives: A Comparative Study Of Proposals In Singapore And Hong Kong, Christopher Chao-Hung Chen

Christopher Chao-hung CHEN

This article identifies some of the potential legal and policy issues involved in the future regulation of over-the-counter (OTC) derivatives. First, regulators must be cautious in the regulation and solvency of some mammoth clearing-houses. Second, Singapore and Hong Kong both face challenges in the areas of global regulatory cooperation and extra-territorial regulatory effects. Third, the exact scope of a clearing obligation determines whether there is any regulatory competition or room for regulatory arbitrage in the future. Fourth, there are legal definition problems with the term ‘derivative’ and its sub-categories that must be addressed. Fifth, there are potential privacy and civil …

Will The Sec Survive Financial Regulatory Reform?, Renee M. Jones

Renee Jones

The Securities and Exchange Commission’s (“SEC”) conspicuous failures during the financial crisis of 2008 have led many to question the agency’s relevance in the modern financial era. Some commentators have called for the creation of new super-agencies to assume a substantial portion of the SEC’s duties. Others highlight enforcement failures and question the agency’s commitment to its investor protection mission. Despite its recent missteps and persistent calls for regulatory overhaul, the SEC’s future seems secure for now as President Obama’s reform proposals (the “Obama Plan”) as currentlyconceived preserve the agency’s independence. Although thus far the Obama Plan protects the SEC’s …

Back To Basics: Why Financial Regulatory Overhaul Is Overrated, Renee M. Jones

Renee Jones

No abstract provided.

Complexity, Innovation And The Regulation Of Modern Financial Markets, Dan Awrey

Dan Awrey

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory; the Modigliani and Miller capital structure irrelevancy principle; the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in …

Learning From Financial History: An Academic Never Forgets, David J. Reiss

David J Reiss

Those with short-term memories have been dominating our debate over the future of the Consumer Financial Protection Bureau. They argue that the financial industry has learned its lesson and they point to a more rational marketplace today. But the Bureau was designed to regulate the subprime mortgage market and other consumer credit markets through the credit cycle. A strong Bureau should be built today to deal with the inevitable irrational exuberance of lenders and consumers once the cycle rises from its current depths to the heights of tomorrow.

Using The Law To Reduce Systemic Risk, Bernard S. Sharfman

Bernard S Sharfman

The recently enacted Dodd-Frank Act will have a major impact on how the financial sector operates. For example, the Act will prohibit banking entities from engaging in the ‘proprietary trading” of financial instruments unrelated to customer-driven business. Surely, this and other provisions found in the Act will help reduce the financial sector’s proclivity for creating systemic risk.

However, the approach taken in the Act to reduce systemic risk is incomplete. The problem is that it is backward-looking. The Act does not take into consideration that, if history is any guide, financial innovation will lead to the development of new financial …

Barriers To Market Discipline: A Comparative Study Of Mortgage Market Regulation, Vincent Di Lorenzo

Vincent Di Lorenzo

This paper explores mortgage market reforms in the U.S. and U.K. in response to the recent mortgage market crisis. Two issues are examined. First, the paper explores the extent to which regulatory bodies have recognized behavioral barriers to market discipline on the part of not only consumers but also industry actors. Second the paper examines the varied response in the U.S. and U.K. to both market limitations and behavioral limitations to self-protection and self-discipline that led to unsafe lending practices in the period 2003 through 2007. The greater emphasis on rules-based regulation in the U.S. after 2008 is compared with …

Book Review: The Subprime Virus: Reckless Credit, Regulatory Failure, And Next Steps, David J. Reiss

David J Reiss

John Godfrey Saxe’s 19th century poem, “The Blind Men and the Elephant,” opens with six learned men

Who went to see the Elephant

(Though all of them were blind),

That each by observation

Might satisfy his mind.

The financial crisis is the Elephant of our time. Over the last couple of years, more than six wise men and women have written books purporting to explain the financial crisis and many more such books are surely in the works. Most of these wise ones suffer from the same limitations as the poem’s learned men. As each reaches out, he or she …

Is It Greek Or Déjà Vu All Over Again?: Neoliberalism, And Winners And Losers Of International Debt Crises, Tayyab Mahmud

Tayyab Mahmud

The global financial meltdown and the Great Recession of 2007-09 have brought into sharp relief the uneven distribution of gain and pain in economic crises. The 2009-10 debt crisis of Greece has resulted in a windfall for financial institutions at the expense of tax-payers, a rollback of welfare systems, and impoverishment of the working classes. This result is in tune with a pattern evidenced by the ubiquitous international debt crises of the last three decades, including the Latin American crisis of the 1980s, and the Asian crisis of 1990s. The recurrent international debt crises of the last three decades and …