Shocks to only part of the financial system, such as the collapse of the subprime mortgage market in 2007, can spread and intensify through the complex interconnections among financial and non-financial institutions to become systemic threats. The consequences can be catastrophic, prompting economists and regulators to study and find ways to curtail such threats by using network theory. Legal scholars, however, have so far largely overlooked that approach, as have policymakers. Most financial regulation remains atomistic, in that it fails to account for the fact that each individual is part of, and plays a role in, a wider network.
In … Read more
It is received wisdom that institutional investors have insufficient incentives to cast informed votes because they compete on relative performance. If BlackRock invests in the monitoring of one of its portfolio companies, it will become relatively less competitive vis-à-vis the other institutional investors that hold shares in that company. In fact, other institutions would reap roughly the same benefits as BlackRock from its monitoring effort, without incurring any cost. Yet, there is evidence that institutional investors, whether actively or passively managed, no longer rubberstamp any proposal managers put to a vote. While that is not, in itself, evidence that institutional … Read more
Financial institutions and their regulators have long been early adopters of new information technologies (IT). In a short essay based on two posts for the Oxford Business Law Blog (available here and here), I first identify four uses of regulatory technology, or RegTech, and then describe four roles for financial regulators in RegTech, and the challenges they face.
The various ways that regulators and policymakers use forms of IT such as data scraping tools, big data analysis, artificial intelligence, and machine learning algorithms can be divided into four categories. The first is Operations RegTech, which targets illegal behavior, such … Read more
In a recent paper, we explore how globalization has affected the operation of securities markets and the challenges this poses for their regulation. The paper is part of the first phase of the New Special Study of the Securities Markets Project.
Securities markets have experienced unprecedented levels of cross-border activity over the past 30 years. Three secular trends have contributed to this phenomenon of globalization. First, liberalization: the removal of national foreign exchange controls and barriers to trade and investment. Second, the growth of collective investment, encouraged by favorable tax treatment of retirement saving. This has fostered a shift … Read more
In the last few years, a source of financing for start-ups, known as crowdfunding, has become widely available. It involves raising capital from a large number of individuals, each of whom typically contributes a small sum. The internet has lowered the costs of crowdfunding by facilitating the dissemination of information about small projects, and its use has grown exponentially, with some $34 billion being raised worldwide through crowdfunding in 2015 alone.
While the availability of crowdfunding is clearly good news for entrepreneurs, its merits for those providing the funding are less certain. Because funders typically put only small sums into … Read more