Banking and Finance Law Commons^™

Central Clearing The U.S. Treasury Market, Yadav Yesha, Joshua Younger

Vanderbilt Law School Faculty Publications

In October 1956, the famed U.S. architect Frank Lloyd Wright revealed a radical and ambitious new project. The Illinois would be a mile high, four times the height of the Empire State Building (at that point still the tallest building in the world). Key to this vision was a type of foundation known as the taproot, which offered a means by which to secure such a towering edifice while still enabling architectural creativity-or, as Wright put it, to "make rigidity possible at [ ] extreme heights." A similar design had previously protected another Wright design, the Imperial Hotel in Tokyo, …

Central Clearing The U.S. Treasury Market, Yesha Yadav

Vanderbilt Law School Faculty Publications

This Essay considers this regulatory response. It focuses on the introduction of mandatory central clearing for most trades in U.S. Treasuries-a proposal seeking to significantly reshape the day-to-day functioning of the Treasury market.10 Central clearing is a well-established means by which to reduce the risk of loss associated when trading parties default. It does so by providing a well-resourced and informed central counterparty (CCP) to step into and stand behind trades. CCPs help promote stability by reducing the probability of, and potential losses associated with, the default of a trading counterparty. But they also impose certain costs on market participants …

Central Bank Undersight: Assessing The Fed’S Accountability To Congress, Andrew T. Levin Professor Of Economics, Christina Parajon Skinner Assoc. Professor

Vanderbilt Law Review

As America’s central bank, the Federal Reserve (“Fed”) is unique among independent agencies in exercising powers that the U.S. Constitution granted to the legislative branch—namely, regulating the value of money and borrowing funds directly from the public. In delegating these powers, Congress designed the Fed to ensure that its monetary policy decisions would be insulated from political interference. Furthermore, Congress has a constitutional obligation to maintain effective oversight of the Fed’s exercise of these duties. Over the past fifteen years, however, the scope and complexity of monetary policy has outpaced Congress’s ability to monitor these policies through existing mechanisms of …

A Global Crypto Code Of Conduct: Crafting An Internationally Centralized Regulatory Body For A Decentralized Asset, Mary Kavaloski

Vanderbilt Journal of Transnational Law

The advent of Bitcoin in 2009 presented a previously unfathomable possibility for the future of currency and monetary transactions. Now, cryptocurrency is ubiquitous; it is increasingly seizing media headlines, novel swathes of investors, institutional bank involvement, and most importantly of all, the attention of government regulators. Yet governments around the globe have failed to adequately keep up with the pace of cryptocurrency's evolution, particularly because of their lack of expertise in this unprecedented area. This Note discusses how cryptocurrency's truly global footprint warrants a partnership between national regulators and industry actors at the international level. Specifically, by exploring the approaches …

Central Bank Immunity, Sanctions, And Sovereign Wealth Funds, Ingrid W. Brunk

Vanderbilt Law School Faculty Publications

Central bank assets held in foreign countries are entitled to immunity from execution under international law. Even as foreign sovereign immunity in general has become less absolute over time, the trend has been toward greater protection for foreign central bank assets. As countries expand their use of central banks, however, recent cases have limited immunity for certain kinds of sovereign wealth funds held by central banks. Sanctions on foreign central bank assets have also become more common, raising issues about the relation- ship between central bank immunity and the recognition of governments, the relationship between immunity and executive actions, and …

The Problematic Forgotten Buyback, Yesha Yadav

Vanderbilt Law School Faculty Publications

Totaling in excess of $100 billion dollars in transactions annually, debt buybacks allow a company to repurchase bonds from investors, rewriting bargains and stripping away creditor control rights in the process. This Article shows that regulation systematically underprotects bondholders in the context of debt buybacks. It makes three points. First, bondholders confront information asymmetries that enable issuers to buy back creditor claims cheaply. Regulation imposes near negligible requirements on issuers to disclose information about the transaction. Lacking fiduciary protection, bondholder interests are vulnerable to being extinguished by issuers in the interests of promoting those of shareholders and managers. Second, buybacks …

Globalize Me: Regulating Distributed Ledger Technology, Roee Sarel, Hadar Y. Jabotinsky, Israel Klein

Vanderbilt Journal of Transnational Law

Distributed Ledger Technology (DLT)—the technology underlying cryptocurrencies—has been identified by many as a game-changer for data storage. Although DLT can solve acute problems of trust and coor- dination whenever entities (e.g., firms, traders, or even countries) rely on a shared database, it has mostly failed to reach mass adoption out- side the context of cryptocurrencies.

A prime reason for this failure is the extreme state of regulation, which was largely absent for many years but is now pouring down via uncoordinated regulatory initiatives by different countries. Both of these extremes—under-regulation and over-regulation—are consistent with traditional concepts from law and economics. …

Fenceposts Without A Fence, Katherine E. Di Lucido, Nicholas K. Tabor, Jeffery Y. Zhang

Vanderbilt Law Review

Banking organizations in the United States have long been subject to two broad categories of regulatory requirements. The first is permissive: a "positive" grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking. The second is restrictive: a "negative" set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide. Together, these requirements form a legal cordon, or "regulatory perimeter," around the U.S. banking sector.

The regulatory perimeter figures prominently in several ongoing policy …

Regulating Global Stablecoins: A Model-Law Strategy, Steven L. Schwarcz

Vanderbilt Law Review

Digital currencies have the potential to improve the speed and efficiency of the payment system. The principal challenge is retail: to facilitate day-to-day payments among consumers as an alternative to cash, both domestically and across national borders. Two models of digital currencies are becoming viable: central bank digital currencies and nongovernment-issued currencies that are backed by assets having intrinsic value (stablecoins or, when widely used internationally, global stablecoins). Because they are not government issued, global stablecoins present complex and novel cross-border regulatory challenges, including managing the costs of complying with a multitude of national laws and ensuring international legal enforceability. …

Gravity And Grace: Foreign Investments And Cultural Heritage In International Investment Law, Valentina Vadi

Vanderbilt Journal of Transnational Law

Globalization and international economic governance have promoted dialogue and interaction among nations, potentially increasing cultural diversity and providing the funds to recover and preserve cultural heritage. However, these phenomena can also jeopardize cultural diversity. Foreign direct investments in the extraction of natural resources have the potential to change cultural landscapes, destroy monuments, and erase memories. In parallel, international investment law constitutes a legally binding and highly effective regime that demands that states promote and facilitate foreign direct investment. Does the existing legal framework adequately protect cultural heritage vis-a-vis the economic interests of foreign investors? To address this question, this Article …

Protecting What Matters: Reflections On A Central Bank's Role At Times Of War, Iris H-Y Chiu, Alan H. Brener

Vanderbilt Journal of Transnational Law

This Article explores the important and multifaceted roles of a central bank in extraordinary times of crisis such as war, focusing on the National Bank of Ukraine (NBU) and its responses in the face of the Russian invasion of Ukraine which began on February 24, 2022. During a time of martial law, institutional preservation and legitimacy can be threatened, but preserving these very institutional tenets is important in defending the nation under siege and in securing future restoration and rebuilding. In this light, we examine the NBU's difficult and conflicting choices in three respects: providing war finance, preserving banking and …

Time To Repay Or Time To Delay? The Effect Of Having More Time Before A Payday Loan Is Due, Paige Marta Skiba, Susan Payne Carter, Kuan Liu, Justin Sydnor

Vanderbilt Law School Faculty Publications

We examine the effect of state laws on minimum payday loan durations that give some borrowers an additional pay cycle to repay their initial loan with no other changes to contract terms. Neoclassical models predict this “grace period” would reduce borrowers’ need for costly loan rollovers. However, in reality, borrowers’ repayment behavior with grace periods is very similar to borrowers with shorter loans, merely pushed out a few weeks. Potential explanations include heuristic repayment decisions and naïve present focus. A calibrated model suggests that present-focused borrowers get less than one-half of the benefit from a grace period that time-consistent borrowers …

The Future Of Ai Accountability In The Financial Markets, Gina-Gail S. Fletcher, Michelle M. Le

Vanderbilt Journal of Entertainment & Technology Law

Consumer interaction with the financial market ranges from applying for credit cards, to financing the purchase of a home, to buying and selling securities. And with each transaction, the lender, bank, and brokerage firm are likely utilizing artificial intelligence (AI) behind the scenes to augment their operations. While AI’s ability to process data at high speeds and in large quantities makes it an important tool for financial institutions, it is imperative to be attentive to the risks and limitations that accompany its use. In the context of financial markets, AI’s lack of decision-making transparency, often called the “black box problem,” …

Money Finds A Way: Increasing Aml Regulation Garners Diminishing Returns And Increases Demand For Dark Financing, Jacquelyn B. Lewis

Vanderbilt Journal of Transnational Law

The cost of anti-money laundering regulations has grown to many billions of dollars, and countries worldwide are increasingly complying with international standards for financial regulation. Yet, the interception rate for criminal proceeds remains under 1 percent. Banks in the United States, United Kingdom, and France continue to engage in unsafe practices, undeterred by legal penalties. Recent US legislation will narrow, but not eliminate, regulatory gaps. The cost of regulation has become so great that banks accept litigation as a cost of doing business or reduce legal exposure by ending relationships in areas of perceived high risk for money laundering; this …

Federal Corporate Law And The Business Of Banking, Morgan Ricks, Lev Menand

Vanderbilt Law School Faculty Publications

The only profit-seeking business enterprises chartered by a federal government agency are banks. Yet there is barely any scholarship justifying this exception to state primacy in U.S. corporate law.

This Article addresses that gap. It reinterprets the National Bank Act (NBA) the organic statute governing national banks, the heavyweights of the financial sec- tor-as a corporation law and recovers the reasons why Congress wrote this law: not to catalyze private wealth creation or to regulate an existing industry, but to solve an economic governance problem. National banks are federal instrumentalities charged with augmenting the money supply-- a delegated sovereign privilege. …

The People's Ledger: How To Democratize Money And Finance The Economy, Saule T. Omarova

Vanderbilt Law Review

The COVID-19 crisis underscored the urgency of digitizing sovereign money and ensuring universal access to banking services. It pushed two related ideas—the issuance of central bank digital currency and the provision of retail deposit accounts by central banks-—to the forefront of the public policy debate. To date, however, the debate has not produced a coherent vision of how democratizing access to central bank money would—and should—transform and democratize the entire financial system. This lack of a systemic perspective obscures the enormity of the challenge and dilutes our ability to tackle it.

This Article takes up that challenge. It offers a …

The Failed Regulation Of U.S. Treasury Markets, Yesha Yadav

Vanderbilt Law School Faculty Publications

In trading the preeminent risk-free security, the $21 trillion U.S. Treasury market supports the country's borrowing needs, financial stability, and investor appetite for a safe asset. Straddling the nexus between a securities market and a systemically essential institution, the Treasury market must function at all costs, even if other markets fail.

This Article shows that Treasury market structure is fragile, weakened by a regulatory model poorly suited to match its design. First, public oversight of Treasuries is fragmented, divided between five or more agencies. The rulebook for Treasuries is sparse, lacking basic guardrails common to other markets. Without effective rules …

Why Supervise Banks? The Foundations Of The American Monetary Settlement, Lev Menand

Vanderbilt Law Review

Administrative agencies are generally designed to operate at arm’s length, making rules and adjudicating cases. But the banking agencies are different: they are designed to supervise. They work cooperatively with banks and their remedial powers are so extensive they rarely use them. Oversight proceeds through informal, confidential dialogue.

Today, supervision is under threat: banks oppose it, the banking agencies restrict it, and scholars misconstrue it. Recently, the critique has turned legal. Supervision’s skeptics draw on a uniform, flattened view of administrative law to argue that supervision is inconsistent with norms of due process and transparency. These arguments erode the intellectual …

Central Banks And Climate Change, Christina P. Skinner

Vanderbilt Law Review

Central banks are increasingly called upon to address climate change. Proposals for central bank action on climate change range from programs of “green” quantitative easing to increases in risk-based capital requirements meant to deter banks from lending to climate-unfriendly business. Politicians and academics alike have urged climate risk as both macroeconomic and financial stability risk. Relative to counterparts abroad, the U.S. central bank—-the Federal Reserve—-has been more measured in its response.

This Article offers a legal explanation why. It urges that, despite the substantive importance of climate change, the U.S. Federal Reserve presently has relatively limited legal authority to address …

Current Regulatory Challenges In Consumer Credit Scoring Using Alternative Data-Driven Methodologies, Sahiba Chopra

Vanderbilt Journal of Entertainment & Technology Law

Credit is a crucial determinant of financial success for most US consumers, but not all consumers can access it. This financial exclusion is partially due to traditional credit-risk scoring and approval processes that cannot assess the creditworthiness of “credit invisible” or “thin file” consumers––that is, consumers who do not have enough traditional data depicting their financial payment history. Consequently, some consumer-reporting agencies and lenders turn to alternative data credit-scoring systems as a way to increase financial inclusion. The enormous complexity of these alternative consumer credit-scoring systems, however, raises significant accuracy and transparency issues—most of which stem from their secret, legally …

Privacy Beyond Possession: Solving The Access Conundrum In Digital Dollars, Nerenda N. Atako

Vanderbilt Journal of Entertainment & Technology Law

The advent of a retail central bank digital currency (CBDC) could reshape the US payments system. A retail CBDC would be a digital representation of the US dollar in the form of an account or token that is widely accessible to the general public. It would be a third form of US fiat money that is created and issued by the Federal Reserve and complementary to physical cash. CBDC proposals have suggested a myriad of retail CBDC design models with an overwhelming interest in a retail CBDC that either implements a centralized ledger system or some form of a distributed …

Fedaccounts: Digital Dollars, Morgan Ricks, J. Crawford, L. Menand

Vanderbilt Law School Faculty Publications

We are entering a new monetary era. Central banks around the world- spurred by the development of privately controlled digital currencies as well as competition from other central banks-have been studying, building, and, in some cases, issuing central bank digital currency ("CBDC").

Although digital fiat currency is one of the hottest topics in macroeconomics and central banking today, the discussion has largely over- looked the most straightforward and appealing strategy for implementing a U.S. dollar-based CBDC: expanding access to bank accounts that the Federal Reserve already offers to a small, favored set of clients. These accounts consist of entries in …

The Political Economy Of The Removal Power, Ganesh Sitaraman

Vanderbilt Law School Faculty Publications

In the years leading up to the 2008 financial crisis, financial institutions targeted communities of color with expensive and risky subprime mortgage products. Hundreds of thousands of Black and Hispanic families were charged more for mortgages than their white counterparts or steered into expensive subprime loans, even though they qualified for cheaper prime loans. Over time, financial institutions like Countrywide pushed these "toxic" loans on more and more homeowners and expanded subprime lending throughout the country. When the music finally stopped in 2008, millions of families lost their jobs and their homes, and nearly $ii trillion in household wealth was …

Fintech And International Financial Regulation, Yesha Yadav

Vanderbilt Journal of Transnational Law

This Article shows that Fintech exacerbates the difficulties of standard setting in international financial regulation. Earlier work introduced the "Innovation Trilemma" (the Trilemma). When seeking to balance the goals of achieving market integrity and innovation through clear and simple rulemaking, regulators can--at best--achieve only two out of these three objectives. Fintech's unique characteristics--a reliance on automation and artificial intelligence, novel types of big data, as well as the use of disintermediating financial supply chains comprising a mix of traditional firms as well as technology specialists and newcomers--complicates the application of the Trilemma. Rulemaking struggles to achieve needed clarity where innovative …

Ico Vs. Ipo: Empirical Findings, Information Asymmetry, And The Appropriate Regulatory Framework, Moran Ofir, Ido Sadeh

Vanderbilt Journal of Transnational Law

Initial coin offerings (ICOs) are a new form of fundraising whereby blockchain-related ventures raise public capital in exchange for newly issued digital tokens. In recent years, ICOs have been a prominent focus of legal and economic studies, which analyze their characteristics and determinants of their success. In this Article, we systematically review these studies and identify key ICO success factors. We then offer theoretical explanations for our findings, and in certain cases, connect the empirical results with the IPO and crowdfunding literatures. The results of our analysis are important for two reasons. First, there is no single formal data source, …

Money, Private Law, And Macroeconomic Disasters, Morgan Ricks

Vanderbilt Law School Faculty Publications

Last year, Ben Bernanke published a blockbuster paper whose importance to the emerging field of law and macroeconomics would be hard to overstate. Titled The Real Effects of Disrupted Credit: Evidence from the Global Financial Crisis,' the paper gets to a vital threshold question for financial stability policy: through what channel or channels do financial crises crush the real economy? Bernanke pits what he calls the "household leverage" narrative of the Great Recession of 2007 to 2009 against what he calls the "financial fragility" narrative. His empirical analysis comes down firmly on the side of the latter narrative. In this …

The Very Brief History Of Decentralized Blockchain Governance, Michael Abramowicz

Vanderbilt Journal of Entertainment & Technology Law

A new form of blockchain governance involving the use of formal games that incentivize participants to identify focal resolutions to normative questions is emerging. This symposium contribution provides a brief survey of the literature proposing and critiquing the use of such mechanisms of decentralized decision-making, and it evaluates early laboratory and real-world experiments with this approach.

Sandbox Boundaries, Hilary J. Allen

Vanderbilt Journal of Entertainment & Technology Law

Around the world, subnational and national regulatory sandboxes are being adopted in an effort to promote fintech innovation. These regulatory sandboxes seek to do so by rolling back some of the consumer protection and prudential regulations that would otherwise apply to firms trialing their financial products and services in the sandbox. While sacrificing such protections in order to promote innovation is problematic, such sacrifice may nonetheless be justifiable if, by working with innovators in the sandbox, regulators are educated about new technologies in a way that enhances their ability to effectively promote consumer protection and financial stability in other contexts. …

The Aid Gap, Chris Cuthrie, Emily Lamm

Vanderbilt Law School Faculty Publications

Women lag men in wages and wealth. Women earn 81 percent as much as similarly situated men,' and they own only 32 percent of the wealth that men own. Lawyers are no different. According to the U.S. Census Bureau, female lawyers make 77 percent as much as their male peers, and according to the National Association of Women Lawyers, female equity partners make almost $1oo,ooo less each year than their male peers. Because wage gaps lead to wealth gaps, female lawyers accrue less wealth than their male counterparts.

Money As Infrastructure, Morgan Ricks

Vanderbilt Law School Faculty Publications

Traditional infrastructure regulation—the law of regulated industries—rests atop three pillars: rate regulation, entry restriction, and universal service. This mode of regulation has typically been applied to providers of network-type resources: resources that are optimally supplied as integrated systems. The monetary system is such a resource; and money creation is the distinctive function of banks. Bank regulation can therefore be understood as a subfield of infrastructure regulation. With few exceptions, modern academic treatments of banking have emphasized banks’ intermediation function and downplayed or ignored their monetary function. Concomitantly, in recent decades U.S. bank regulation has strayed from its infrastructural roots. This …