Banking and Finance Law Commons^™

Transparency Is The New Opacity: Constructing Final Regulation After The Crisis, Caroline Bradley

Articles

No abstract provided.

Systemic Risk After Dodd-Frank: Contingent Capital And The Need For Regulatory Strategies Beyond Oversight, John C. Coffee Jr.

Faculty Scholarship

Because the quickest, simplest way for a financial institution to increase its profitability is to increase its leverage, an enduring tension will exist between regulators and systemically significant financial institutions over the issues of risk and leverage. Many have suggested that the 2008 financial crisis erupted because flawed systems of executive compensation induced financial institutions to increase leverage and accept undue risk. But that begs the question why such compensation formulas were adopted. Growing evidence suggests that shareholders favored these formulas to induce managers to accept higher risk and leverage. Shareholder pressure, then, is a factor that could cause the …

Pay For Banker Performance: Structuring Executive Compensation For Risk Regulation, Frederick Tung

Faculty Scholarship

Excessive risk taking by firm managers did not originate with the Financial Crisis of 2007-08. Though bankers had special incentives to take big risks in the period before the Crisis, the incentive effects of equity-based compensation have been understood for some time. Among other things, equity compensation tends to induce greater risk taking by aligning managers’ risk preferences with those of equity holders. Longstanding government guaranties of bank liabilities additionally served to intensify bankers’ risk taking incentives.

I propose to ameliorate this gambler’s incentive with a new approach to compensation at the largest banks, one that explicitly accounts for the …

The Fsa, Integrated Regulation, And The Curious Case Of Otc Derivatives, Dan Awrey

Cornell Law Faculty Publications

With a view to better understanding the optimal structure of financial regulation, this paper tests prevailing theoretical hypotheses respecting the efficiency and overall desirability of integrated financial regulation relative to competing institutional models. This test is conducted through the lens of a comparative case study examining the approaches adopted by (fragmented) U.S financial regulators and the (integrated) UK Financial Services Authority (FSA) toward the myriad of regulatory challenges posed by the emergence, growth, and systemic importance of over-the-counter (OTC) derivatives markets. More specifically, this paper examines why, despite the numerous theoretical advantages of integrated regulation, the FSA adopted a non-interventionist …

Introduction: The Market Meltdown Of 2008 And The Future Of Financial Reregulation [Article], Faith Stevelman

Articles & Chapters

No abstract provided.

Guilty By Association? Regulating Credit Default Swaps, Houman B. Shadab

Articles & Chapters

A wide range of U.S. policymakers initiated a series of actions in 2008 and 2009 to bring greater regulation and oversight to credit default swaps (CDSs) and other over-the-counter derivatives. The policymakers’ stated motivations echoed widely expressed criticisms of the regulation, characteristics, and practices of the CDS market, and focused on the risks of the instruments and the lack of public transparency over their utilization and execution. Certainly, the misuse of certain CDSs enabled mortgage-related security risk to become overconcentrated in some financial institutions.

Yet as the analysis in this Article suggests, failing to distinguish between CDS derivatives and the …

Counterparty Regulation And Its Limits: The Evolution Of The Credit Default Swaps Market, Houman B. Shadab

Articles & Chapters

Over-the-counter (OTC) derivatives are widely regarded as “unregulated” financial instruments. While it is true that OTC derivatives are subject to relatively minimal federal regulation, OTC derivatives are in fact subject to a robust form of control and governance in the form of counterparty regulation. Counterparty regulation arises when two or more parties are continually exposed to counterparty credit risk for the duration of a long-term contract, and it consists of specific governance mechanisms such as the daily adjustment of collateral and the netting out of redundant trades. Counterparty regulation governs derivatives transactions but not securities transactions.

This essay reviews recent …

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

Cornell Law Faculty Publications

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 …

Financial Crisis Containment, Anna Gelpern

Scholarly Articles in Law Reviews & Journals

This Article maps financial crisis containment - extraordinary measures to stop the spread of financial distress - as a category of legal and policy choice. I make three claims.

First, containment is distinct from financial regulation, crisis prevention and resolution. Containment is brief; it targets the immediate term. It involves claims of emergency, rule-breaking, time inconsistency and moral hazard. In contrast, regulation, prevention and resolution seek to establish sound incentives for the long term. Second, containment decisions deviate from non-crisis norms in predictable ways, and are consistent across diverse countries and crises. Containment invariably entails three kinds of choices: choices …

Deeply Persistently Conflicted: Credit Rating Agencies In The Current Regulatory Environment, Timothy E. Lynch

Faculty Works

Credit rating agencies have a pervasive and potentially devastating influence on the financial well-being of the public. Yet, despite the recent passage of the Credit Rating Agency Reform Act, credit rating agencies enjoy a relative lack of regulatory oversight. One explanation for this lack of oversight has been the appeal of a self-regulating approach to credit rating agencies that claim to rely deeply on their reputational standing within the financial world. There are strong arguments for doubting this approach, including the conflicting self-interest of credit rating agencies whose profits are gained or lost depending on their ability to lure the …

Faith-Based Financial Regulation: A Primer On Oversight Of Credit Rating Organizations, Christopher L. Sagers, Thomas J. Fitzpatrick

Law Faculty Articles and Essays

In light of the present economic crisis and their role in it, the world seems suddenly keen to know more about the handful of private corporations--variously known as bond rating agencies, credit rating agencies, credit rating organizations (CROs), or the like--that rate the creditworthiness of corporate and government debt securities. By most accounts, these companies hold extensive sway in public capital markets, and for about thirty years, a few of them have enjoyed literally de jure delegation of federal regulatory oversight over much of the U.S. financial sector. With that power their ratings have value regardless of their accuracy, and …

The Subprime Crisis And The Link Between Consumer Financial Protection And Systemic Risk, Erik F. Gerding

Publications

This Article argues that the current global financial crisis, which was first called the “subprime crisis,” demonstrates the need to revisit the division between financial regulations designed to protect consumers from excessively risky loans and safety-and-soundness regulations intended to protect financial markets from the collapse of financial institutions. Consumer financial protection can, and must, serve a role not only in protecting individuals from excessive risk, but also in protecting markets from systemic risk. Economic studies indicate it is not merely high rates of defaults on consumer loans, but also unpredictable and highly correlated defaults that create risks for both lenders …

Financial Crisis Containment, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

This Article maps financial crisis containment - extraordinary measures to stop the spread of financial distress - as a category of legal and policy choice. I make three claims.

First, containment is distinct from financial regulation, crisis prevention and resolution. Containment is brief; it targets the immediate term. It involves claims of emergency, rule-breaking, time inconsistency and moral hazard. In contrast, regulation, prevention and resolution seek to establish sound incentives for the long term. Second, containment decisions deviate from non-crisis norms in predictable ways, and are consistent across diverse countries and crises. Containment invariably entails three kinds of choices: choices …

The Subprime Crisis And The Link Between Consumer Financial Protection And Systemic Risk, Erik F. Gerding

Publications

This Article will appear in a May 2009 symposium issue of the Florida International University Law Review on the global financial crisis. This Article argues that the current global financial crisis, which was first called the “subprime crisis,” demonstrates the need to revisit the division between financial regulations designed to protect consumers from excessively risky loans and safety-and-soundness regulations intended to protect financial markets from the collapse of financial institutions. Consumer financial protection can, and must, serve a role not only in protecting individuals from excessive risk, but also in protecting markets from systemic risk. Economic studies indicate it is …

Code, Crash, And Open Source: The Outsourcing Of Financial Regulation To Risk Models And The Global Financial Crisis, Erik F. Gerding

Publications

The widespread use of computer-based risk models in the financial industry during the last two decades enabled the marketing of more complex financial products to consumers, the growth of securitization and derivatives, and the development of sophisticated risk-management strategies by financial institutions. Over this same period, regulators increasingly delegated or outsourced vast responsibility for regulating risk in both consumer finance and financial markets to these privately owned industry models. Proprietary risk models of financial institutions thus came to serve as a "new financial code" that regulated transfers of risk among consumers, financial institutions, and investors.

The spectacular failure of financial-industry …

Leverage In The Board Room: The Unsung Influence Of Private Lenders In Corporate Governance, Frederick Tung

Faculty Scholarship

The influence of banks and other private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or account for this lender influence. Corporate governance discourse has traditionally focused only on corporate law arrangements. The few existing accounts of creditors' influence over firm managers emphasize the drastic actions creditors take in extreme cases - when a firm is in serious trouble - but in fact, private lender influence is a routine feature of corporate governance even absent financial distress. …

Geo-Politics, The ‘War On Terror’ And The Competitiveness Of The City Of London, Richard Woodward

Books/Book Chapters

No abstract provided.

Laws Against Bubbles: An Experimental-Asset-Market Approach To Analyzing Financial Regulation, Erik F. Gerding

Publications

This article analyzes the effectiveness of proposed and actual securities, financial, and tax laws designed to prevent, or dampen the severity of asset price bubbles, including laws designed to mitigate excessive speculation. The article employs experimental asset market research to measure the effectiveness of these anti-bubble laws in correcting mispricings. Experimental asset markets represent complex simulations of stock markets in which subjects trade securities over a computer network. These markets allow scholars to test causal links between legal policies and market effects in ways that empirical research alone cannot. With these virtual markets, researchers can identify asset price bubbles - …

Governing The City Of London In A Global Era: The Promise And Problems Of Transgovernmental Regulatory Networks, Richard Woodward

Books/Book Chapters

No abstract provided.

Private International Law-Making For The Financial Markets, Caroline Bradley

Articles

No abstract provided.

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 …

The New Policy Agenda For Financial Services, Richard S. Carnell

Fordham Journal of Corporate & Financial Law

No abstract provided.

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 …

The Separation Of Banking And Commerce Reconsidered, Stephen K. Halpert

Articles

No abstract provided.