Law Commons^™

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 …

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 …

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 …

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 …

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 …

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 …

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 …

Costing Financial Regulation, Caroline Bradley

Articles

No abstract provided.

Transparency And Financial Regulation In The European Union: Crisis And Complexity, Caroline Bradley

Articles

No abstract provided.

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 …

The Governance Of China’S Finance, Katharina Pistor

Faculty Scholarship

This chapter examines the governance of China's financial system, which, it shows, cannot be adequately explained using conventional paradigms that rely on ownership and legal or regulatory controls alone. Instead, China's governance regime relies heavily on human resource management, which uses control rights over the career path of top-level financial cadres. A commentary is included at the end of the chapter.

What Is A Security In The Crowdfunding Era?, Joan Macleod Heminway

Scholarly Works

With the advent of the crowdfunding era, financial interests in business enterprises may look less like investment instruments commonly known as common stock or debentures, and more like loans, gambling bets, rights to consumable products or services or charitable or other nonprofit donations. A closer look at innovations in interests, instruments and offerings in the crowdfunding era preceding the enactment of the Jumpstart Our Business Startups Act (JOBS Act) offers a basis for comparisons and contrasts that raises questions about the categorization of instruments regulated as securities. These and other questions are important to a rethinking of the structure of …

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 …

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 …