Law Commons^™

Creditors, Shareholders, And Losers In Between: A Failed Regulatory Experiment, Albert H. Choi, Jeffery Zhang

Law & Economics Working Papers

In the aftermath of the 2007-08 Global Financial Crisis, regulators encouraged many of the world’s largest banks to hold a new type of regulatory instrument with the goal of improving their safety and soundness. The regulatory instrument was known as a “CoCo,” short for contingent convertible bond. CoCos are neither debt nor equity. They are something in between, designed to give the bank a shot in the arm during times of stress. Many of the largest international banks have issued CoCos worth hundreds of billions of dollars. After more than ten years—a decade that includes the collapse of Credit Suisse …

Celebrating Markham’S Approach To Financial History: Getting At The Macro One Deal At A Time, José Gabilondo

FIU Law Review

Professor Markham's financial history does an excellent job of reviewing and analyzing financial history for the period from the Great Recession to the COVID pandemic. His granular approach to financial history conveys macro-trends by focusing on the most defining transactions and episodes from this period.

Rethinking 'What Counts' As Accountability, Jonathan Fox

Perspectives

The current accountability impasse suggests it may be time to rethink core concepts, as well as the field’s underlying theories of change. The idea of accountability is malleable, ambiguous — and contested. This fuzziness poses challenges for both theory and practice – how do we know what strategies bolster accountability – or whether accountability produces its expected effects? This think piece recognizes the challenge of defining ‘what counts’ as accountability, unpacks a longstanding theory of change - that sunshine is the best disinfectant - and considers some information-based reform initiatives to identify missing links in the causal chain between transparency …

Reflections On The Role Of The Panel, Charles Di Leva

Perspectives

Over the past thirty years, the World Bank and the Inspection Panel have had a supportive relationship regarding the principle of accountability, particularly as applied to the field of development finance operations and the role and responsibility of the Bank as a multilateral public sector financial institution. This relationship has been apparent in at least three key aspects: i) following the Bank’s lead, many development institutions around the globe have taken steps to improve their own accountability and developed independent accountability mechanisms (IAMs) modeled on the Inspection Panel; ii) the Bank and other development institutions have been supporting the development …

Ending Violence In Development Finance Actions To Affirmatively Prevent And Stop Reprisals Against Rights Defenders, Gregory Berry

Perspectives

This Essay makes a case for stronger enforcement and implementation of zero-tolerance policies on reprisals within Development Finance Institutions. It argues that for DFIs to inculcate any hopeful vision of a just and inclusive transition to a sustainable future, they must begin by affirmatively cutting at the roots of reprisals. The essay particularly emphasizes two essential changes. First, Independent Accountability and Audit Mechanisms must be empowered to protect the safety of defenders by self-initiating investigations where there are credible concerns of reprisals, and by accepting anonymously submitted complaints. Second, DFIs must evolve to grow teeth for enforcing measures against retaliatory …

Thirty Years Of Community-Centered Accountability In International Development Key Developments At The World Bank Inspection Panel, Dilek Barlas

Perspectives

Through the lens of important cases, this essay reflects on major developments that occurred at the Panel during the tenure of the author as the Executive Secretary of the World Bank Inspection Panel and shows how the Panel has evolved to improve accessibility, has influenced overall development policies, and has become a catalyst for institutional change. The essay observes that the Panel’s success has largely been due to its structural and operational independence, reporting as it does directly to the Bank’s Board of Executive Directors. However, there are challenges facing the Panel on certain issues, including most importantly its independence, …

Three Decades Of Seeking Elusive Remedies, Richard E. Bissell

Perspectives

Remedy is a topic to be approached with some trepidation in the area of accountability. Throughout three decades of proliferating International Accountability Mechanisms ( IAMs), remedy has been the issue least addressed by leadership. Most management and board members find it threatening, wherever a remedial action falls on the spectrum, from an apology for error to financial compensation. The pursuit of remedy builds on the demonstrated existence of harm, which is embarrassing at the least, and brings a focus on consequences and actionable steps for those people whose lives have been damaged as well as for environmental violations. This short …

Glass Half-Full Or Glass Half-Empty? Thirty Years Of Accountability At The Inspection Panel--The Impact Of Its Work And What The Data Tells Us, Ramanie Kunanayagam, Mark Goldsmith, Ibrahim James Pam, Serge Selwan, Richard Wyness, Ayako Kubodera, Camila Jorge Do Amarel, Rupes Dalai

Perspectives

“A stroke of a genius”, “a bold experiment in transparency and accountability that has worked to the benefit of all concerned”, “a precedent under international law”, and a “citizen-based accountability mechanism” are some of the ways in which close observers have described the World Bank Inspection Panel, which celebrated its thirtieth anniversary in 2023.

Beware The Proposed Us Crypto Regulation— It May Be A Trojan Horse, Hilary J. Allen

Popular Media

Following the spectacular failure of crypto exchange FTX International, there have been renewed calls for crypto legislation (including from the industry itself).But many of the proposals so far would be worse than the status quo — at least for the general public. Crypto firms such as FTX were involved in drafting many of the mooted US bills. The exchange’s implosion should not become a pretext for rushing these into law.

The European Aspects Of Global Financial Developments, Virag Ilona Blazsek

The Journal of Business, Entrepreneurship & the Law

What is the position of Europe—and specifically the European Union (EU)—on the world map of global finances in 2017? This comment seeks to answer this question by focusing on three key issues. First, it analyzes Europe’s post-2008 bank bailouts, its sector-wide rescue packages, and its consequential sovereign-debt crisis. Second, it considers the role of the international credit rating agencies and asks why Europe does not have a large rating agency of its own. Third, it assesses the EU’s major recent regulatory developments related to the financial sector. There is no doubt that Europe is in a sustained economic and political …

A Theory Of Financial Services Competition, Compliance And Regulation, Bryane Michael

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

Do financial regulation advisors (like Capco) help their clients become more profitable? In this paper, we present a model where financial service firms may add to their own compliance teams or hire outside compliance advisors. We derive the conditions under which a financial services firm will want to hire a compliance services company, and show how much money they should spend. Financial services firms in competitive locations like Hong Kong and Singapore will particularly benefit (at least in the short run) from their services. We also show that their advice may lead to an embarrass de riches – whereby the …

The Broken Buck Stops Here: Embracing Sponsor Support In Money Market Fund Reform, Jill E. Fisch

All Faculty Scholarship

Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis because widespread redemption demands during the days following the Lehman bankruptcy contributed to a freeze in the credit markets. In response, MMFs were deemed a component of the nefarious shadow banking industry and targeted for regulatory reform. The Securities and Exchange Commission’s (SEC) misguided 2014 reforms responded by potentially exacerbating MMF fragility while potentially crippling large segments of the MMF industry.

Determining the …

Regulation By Hypothetical, Mehrsa Baradaran

Vanderbilt Law Review

A new paradigm is afoot in banking regulation-and it involves a turn toward the more speculative. Previous regulatory instruments have included geographic restrictions, activity restrictions, disclosure mandates, capital requirements, and risk management oversight to ensure the safety of the banking system. This Article describes and contextualizes these regulatory tools and shows how and why they were formed to deal with industry change. The financial crisis of 2008 exposed the shortcomings in each of these regimes. In important ways, the Wall Street Reform and Consumer Protection Act of 2010 ('Dodd-Frank') departs from these past regimes and proposes something new: Call it …

A Return To Old-Time Religion? The Glass-Steagall Act, The Volcker Rule, Limits On Proprietary Trading, And Sustainability, Douglas M. Branson

Articles

Pursuant to directions contained in the Dodd-Frank Act (2010), five federal agencies collaborated to produce a 983 page rule limiting proprietary trading by financial institutions (the Volcker Rule, which becomes effective in summer, 2015). The Volcker Rule limits proprietary trading to no more than 3 percent of “Tier One” assets. The hoped for effects are that financial institutions will be strictly limited in trading for their own accounts. Some say, propelled by unbridled greed, U.S. financial institutions borrowed excessive amounts of money, inflating leverage ratios as high as 36 or 40 to 1, using the borrowed funds to engage in …

Banking And The Social Contract, Mehrsa Baradaran

Scholarly Works

This article asserts that there exists today and has always existed an interdependent relationship between banks and the state. I refer to this connection and its mutual benefits and responsibilities as a social contract. When Alexander Hamilton responded to President Washington’s inquiry about the advisability of a national bank, he wrote that “such a Bank is not a mere matter of private property, but a political machine of the greatest importance to the State.” This social contract has existed since the inception of banking in the United States and has been reinforced over time, but it has recently become weakened …

The Impossible, Highly Desired Islamic Bank, Haider Ala Hamoudi

Articles

The purpose of this Article is to explore, and explain the stubborn persistence of, a central paradox that is endemic to the retail Islamic bank as it operates in the United States. The paradox is that retail Islamic banking in the United States is impossible, and yet it remains highly desired. It is impossible because the principles that are supposed to underlie the practice of Islamic finance deal with the trading of assets and the equitable sharing of risks, profits and losses among bank, depositor and portfolio investment. It is true that much of this can be, and is, circumvented …

Chuaigh Ár Lá – Debt Of A Gaelsman: Ireland’S Sovereign Debt Crisis, National And International Responses, James Croke

Northwestern Journal of International Law & Business

How did a small island nation on the periphery of Europe go from the pauper of the European Union, to a paragon of a market economy, and back to fiscal ruin within the space of twenty years? Ireland was the poorest nation in the European Economic Community (EEC) in 1988. In the late 1980’s and early 1990’s it undertook structural reforms to fundamentally reshape its economy, the result was a booming economy throughout the mid-to-late 1990’s and early 2000’s, primarily fueled by exports and foreign direct investment. Rather than continue on a sustained, but slower, growth path in the 2000’s, …

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 Regulator Performance, Frederick Tung, M Todd Henderson

Faculty Scholarship

Few doubt that executive compensation arrangements encouraged the excessive risk taking by banks that led to the recent Financial Crisis. Accordingly, academics and lawmakers have called for the reform of banker pay practices. In this Article, we argue that regulator pay is to blame as well, and that fixing it may be easier and more effective than reforming banker pay. Regulatory failures during the Financial Crisis resulted at least in part from a lack of sufficient incentives for examiners to act aggressively to prevent excessive risk. Bank regulators are rarely paid for performance, and in atypical cases involving performance bonus …

Those Who Forget The Regulatory Successes Of The Past Are Condemned To Failure, William K. Black

Faculty Works

This paper shows that the reregulation of the savings & loan (S&L) industry was successful because the regulators correctly identified the primary cause of the second phase of the debacle as an epidemic of “accounting control fraud” and took effective measures to contain such frauds. Control frauds occur when the persons controlling a seemingly legitimate organization use it as a “weapon” to defraud. In the financial sector, accounting control fraud is the “weapon of choice.” The regulators’ primary insights were (1) that lenders optimize accounting fraud by engaging in a distinctive operational pattern that would be irrational for any honest …

Into The Void: Governing Finance In Central & Eastern Europe, Katharina Pistor

Faculty Scholarship

Twenty years after the fall of the iron curtain, which for decades had separated East from West, many countries of Central and Eastern Europe (CEE) are now members of the European Union and some have even adopted the Euro. Their readiness to open their borders to foreign capital and their faith in the viability of market self-governance as well as supra-national governance of finance is both remarkable and almost unprecedented. The eagerness of the countries in CEE to join the West and to become part of a regional and global regime as a way of escaping their closeted socialist past …

The Return Of The Rogue, Kimberly D. Krawiec

Kimberly D. Krawiec

The rogue trader—a figure that captured public attention in the 1990s— has returned to the spotlight, largely due to two phenomena. First, market volatility stemming from problems in the U.S. mortgage market spilled over into stock, commodity, and derivative markets worldwide, causing large losses at many financial institutions and bringing to light previously hidden unauthorized positions. Second, the rogue trader has returned to prominence due to domestic and international regulatory changes that have forced banks worldwide to focus more attention on operational risk, an important component of which is rogue trading.

Although critics have raised a number of objections to …

When Fragile Become Friable: Endemic Control Fraud As A Cause Of Economic Stagnation And Collapse, William K. Black

Book Chapters

Individual “control frauds” cause greater losses than all other property crime combined. They are financial super-predators. Control frauds are crimes by the head of state or CEO that use the nation or company as a “weapon.” Waves of “control fraud” can cause economic collapses, discredit institutions vital to governance, and erode trust. Fraud’s defining element is deceit – the criminal creates and then betrays trust. Fraud erodes trust. Endemic control fraud causes institutions and trust to crumble and produces economic stagnation.

Economic theory about fraud is underdeveloped, economists are not taught about fraud mechanisms, and economists minimize the incidence and …

Comment Letter To The U.S. Treasury Department Concerning The Regulatory Structure For Financial Institutions, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

This comment letter was submitted to the U.S. Treasury Department in connection with that Department's review of proposals for changes in the regulatory structure for financial institutions. The comment letter presents the following policy recommendations: (1) the thrift charter should be eliminated, existing thrifts should be required to convert into banks, and the Office of Thrift Supervision should be merged with the Office of the Comptroller of the Currency (OCC); (2) the dual banking system should be preserved and strengthened in order to promote innovation in banking regulation and to support the community bank sector; (3) at least one federal …

Bank Mergers In North America: Comparing The Approaches In The United States And Canada, Eric J. Gouvin

Faculty Scholarship

This Article provides a summary comparison of the processes in the United States and Canada for governmental approval of bank mergers. The topic came to prominence in 1998 when four of Canada's five largest banks unveiled plans that would have resulted in the Royal Bank of Canada merging with the Bank of Montreal and the Toronto Dominion Bank combining with the Canadian Imperial Bank of Commerce ("CIBC"). These proposed mergers were rejected by the then Finance Minister, Paul Martin. The reasons given included: (1) the resulting banking industry structure would have concentrated too much economic power in the hands of …

Banks And Inner Cities: Market And Regulatory Obstacles To Development Lending, Keith N. Hylton

Faculty Scholarship

Why are poor inner cities underserved by financial institutions, and why is it so difficult to find a solution to this problem? Explanations of the lending shortfall problem range between theories based on discrimination to the view that the lending market is working flawlessly. Drawing largely on the economic development literature, I elaborate an alternative explanation here. The asymmetric information theory I offer yields the prediction that urban minority communities will be underserved by financial institutions even in the absence of discriminatory intent.

I claim that the existing framework of banking regulation is in part responsible for the difficulty in …

Shareholder Enforced Market Discipline: How Much Is Too Much?, Eric J. Gouvin

Faculty Scholarship

This Article considers the federal banking regulation regime implemented in response to the widespread bank failures of the 1980s and early 1990s. The first section of the Article examines the moral hazard problem created by the presence of the deposit insurance scheme and the market discipline debate that has attempted to correct the moral hazard problem. The Author argues that the law has evolved to make bank holding companies the primary enforcers of market discipline. The Article’s second section examines the specific regulatory changes that have been designed to create an incentive for bank holding companies to impose discipline on …

Anti-Money Laundering Regulations: A Burden On Financial Institutions, Duncan E. Alford

Faculty Publications

No abstract provided.

Regulatory Theory And Deposit Insurance Reform, R. Mark Williamson

Cleveland State Law Review

The purpose of this article, however, is not to summarize the maze of federal and state banking regulation. Instead, recognizing that deposit insurance is a centerpiece of the overall regulatory scheme to which any financial institution in the United States is subject, this article is primarily concerned with subjecting this form of bank regulation to analysis based upon general principles of regulatory theory. This article is less concerned with the details of banking law than it is with using regulatory to shape policy guidelines for the coming process of deposit insurance reform.

Regulatory Theory And Deposit Insurance Reform, R. Mark Williamson

Cleveland State Law Review

The purpose of this article, however, is not to summarize the maze of federal and state banking regulation. Instead, recognizing that deposit insurance is a centerpiece of the overall regulatory scheme to which any financial institution in the United States is subject, this article is primarily concerned with subjecting this form of bank regulation to analysis based upon general principles of regulatory theory. This article is less concerned with the details of banking law than it is with using regulatory to shape policy guidelines for the coming process of deposit insurance reform.