One of the most far-reaching legacies of twentieth century law is the establishment of comprehensive public regulation as the norm for governance of vast swaths of commerce. The reality of persistent and rapid technological change is, however, proving fatal for this paradigm in the field of payment systems.
Non-cash payment systems in the United States have been dominated by public-law regulatory schemes for well over a century, ranging from the 1896 Uniform Negotiable Instruments Law to the payment articles in today’s Uniform Commercial Code. The law of checks—long the dominant form of non-cash payments—was comprehensively codified in the UCC. By … Read more
On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.
- Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using
… Read more
Mutual funds are becoming more like hedge funds as a matter of investment strategy while hedge funds are becoming more like mutual funds as a matter of the regulatory framework. The growth of the private fund industry and the proliferation of retail alternative funds in combination with the fundamental regulatory reform of the private fund industry through the Dodd-Frank Act and the JOBS Act make the convergence of mutual and private funds possible. Such convergence has large implications for the evolution of the private fund industry and the growth of the retail alternative fund market.
For most of their history, … Read more
The year 2015 marked the fifth anniversary of passage of the Dodd-Frank Act and, for many private fund managers, the third anniversary of SEC registration under the Investment Advisers Act. The past year also saw a number of notable SEC regulatory trends and developments affecting private fund managers. Here are the highlights.
Undisclosed Conflicts of Interest
Throughout 2015, the SEC focused on undisclosed conflicts of interest, noting that it would make finding such conflicts an examination priority and that it would follow through with enforcement actions when it found such conflicts. In particular, the SEC keyed in on the following … Read more
In September 2007, Northern Rock, a British bank, sought and received liquidity support from the Bank of England because of financial difficulties resulting from the global financial crisis. As a result of mounting political pressure that Northern Rock was exploiting taxpayers’ money to pay its shareholders, the bank decided to scrap a £59m interim dividend payout, which had been announced before the beginning of the crisis (Financial Times, 2007).
Recent academic literature (Acharya et al., 2011; Onali, 2014) shows that banks in financial distress pay dividends to exploit government support, and this results in a transfer of bank default risk … Read more
There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (in the United States, spelled securitization) transactions. European investors commonly invest in securities issued in U.S. securitisation transactions, and vice versa.
It is generally agreed that securitisation’s abuses contributed to the global financial crisis. Repayment of securities issued in certain highly leveraged securitisation transactions was so sensitive to cash-flow variations that, when the cash-flow assumptions turned out to be wrong, many of these highly rated securities defaulted or were downgraded. That, in turn, sparked a loss of confidence in the value of … Read more
My recent paper explains why, from a bank supervisory perspective, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) program is arguably the single most significant and innovative post-crisis regulatory reform. Established in 2011, the CCAR is an annual Federal Reserve exercise to evaluate the capital planning processes and capital adequacy of the largest bank holding companies and other financial institutions designated as systemically important by the Financial Stability Oversight Council.
In this blog post, I will highlight three observations concerning the CCAR program. First, I will explain the significant practical implications of the CCAR for large U.S.-domiciled banks. Second, … Read more
The quasi collapse of the global financial system during the crisis of 2007-2009 has triggered an extensive debate about the role of large complex banks. On the one hand, banks are seen as “too complex to fail”, and researchers and policy makers argue that the main danger is that financial institutions and markets are becoming “too big to understand” or “too complex to depict”, and therefore need to shrink and be simplified. On the other hand, bankers argue that caps on bank size are inefficient because both size and complexity help banks diversify risks and innovate to create additional profit … Read more
On November 3rd, high-frequency trader Michael Coscia was found guilty in Chicago in one of the most-watched financial trials in recent years. His conviction under Dodd-Frank’s new anti-spoofing provision is important on a number of levels: what it means for a number of other market manipulation investigations, its deterrence value going forward, and the failure of the void for vagueness challenge mounted by the defense. Coscia gives the imprimatur of the Federal courts to Dodd-Frank Section 747 as a tool to police the markets in the new financial world where “trades are not the basic unit of market information—the … Read more
The Basel Committee on Banking Supervision (BCBS) on December 10th issued the second iteration of its proposed revisions to the standardized approach (SA) for credit risk measurement. Following up on last year’s initial issuance, the proposed revisions are intended to amend BCBS’s currently applicable SA in order to achieve a better balance between risk sensitivity, simplicity, and comparability.
While the latest proposal includes significant changes from last year’s version in response to BCBS’s quantitative impact study (QIS) and industry comments, several important issues remain. Most importantly, the revised proposal does not include an implementation timeline, and kicks the can … Read more
Debt has undergone a remarkable resurrection in relation to banks’ capital structures. In the immediate aftermath of the crisis it was uncertain whether debt would survive at all in the Basel Committee’s minimum capital requirements for internationally active banks. Today, however, debt is heavily promoted by bank regulators as an essential ingredient in the resolution arrangements for global systemically important banks (GSIFIs). In my article, The Fall and Rise of Debt in Bank Capital Structures, I chart how this remarkable change came about.
In the aftermath of the financial crisis of 2007-9 much criticism was directed at the low … Read more
In two previous posts, I described the financial industry’s “single point of entry” (SPOE) strategy for resolving failed megabanks. The SPOE approach – which has been endorsed by the Federal Reserve Board (Fed) and other regulators – could be implemented under the Orderly Liquidation Authority (OLA) established by Title II of the Dodd-Frank Act or under a proposed new “Chapter 14” of the Bankruptcy Code. As I explained in my previous posts and a forthcoming law review article, an SPOE resolution would involve only the parent holding company of a failed megabank and would impose losses only on … Read more
The conventional story around the Gramm-Leach-Bliley Act is that it was the final blow in bringing down the Glass-Steagall Act wall that separated commercial and investment banking in 1999, increasing risky business activities by commercial banks and inadvertently precipitating the 2007 financial crisis. But the conventional story is only one-half complete. What it omits is the effect of change in commercial bank regulation on investment banks. After all, it was the failure of Lehman Brothers—an investment bank, not a commercial bank—that sparked the meltdown.
My recent article, Size Matters: Commercial Banks and the Capital Markets, fills in the rest … Read more
The US Federal Reserve (Fed) again expressed concerns about the culture at financial institutions this month. This has been a recurring theme since the financial crisis, as regulators in the US and abroad have hit industry players with steep fines for employee misconduct. Since 2008, the largest global banks have cumulatively paid out over $300 billion in fines, with US banks paying about half of that amount.
EU and UK regulators have been the most active in pushing banks to address their culture weaknesses. The EU has introduced new rules limiting bonuses paid to senior employees that are … Read more
The global financial crisis forced regulators to realize that traditional monetary measures cannot adequately ensure financial stability. As an alternative, macroprudential policy can complement and supplement monetary policy in dealing with macroeconomic as well as stability issues. Yet the debate on macroprudential policy remains quite obscure for many.
In a recent article just published in Banking & Financial Services Policy Report (a longer version is available here), my co-authors and I provide an overview of macroprudential policy discussion from the fundamental rationales behind such policies to the set of measures currently used. The main messages can be summarized as … Read more
What are we to make of growing levels of student indebtedness?
On the one hand, commentary in the popular media consistently extols the virtues of investing in higher education, and serious economists back them up. On the other hand, borrowing by students to pay for college has increased dramatically in recent decades, and that debt can be a crushing burden for some borrowers. A greater percentage of borrowers has gone into default in recent years, no doubt slammed by a more difficult economy and higher monthly payment obligations on larger balances. In the context of steadily increasing education … Read more
The Wall Street Journal recently reported that federal prosecutors are pursuing criminal cases against bank executives for allegedly selling flawed mortgage securities. The crux of the cases? That the bankers ignored warnings they were packaging too many shaky mortgages into investment securities and failed to disclose the risks to others. The result, they claim, was fraud.
In a recent paper, The Nonprime Mortgage Crisis and Positive Feedback Lending, we collected evidence that the risk of a nonprime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the originators, securitizers, rating agencies, money managers, and … Read more
Section 4c(a)(5)(C) of the Commodities Exchange Act (CEA), 7 U.S.C. § 6c(a)(5)(C), newly added to the CEA by the Dodd-Frank reform legislation, prohibits spoofing as well as activity that is “of the character” of spoofing. The statute defines “spoofing” but does not spell out what conduct may be “of the character of spoofing.” The outer boundaries of that conduct remain unclear. The Commodity Futures Trading Commission (CFTC) has said that the four types of behavior listed in its 2013 guidance on the new spoofing statute are not exclusive. See CFTC, Antidisruptive Practices Authority, 78 Fed. Reg. 31890, 31896 (May … Read more
On December 10th, Columbia Law School’s Millstein Center on Global Markets and Corporate Ownership will be hosting its 10th annual Millstein Governance Forum.
For the past decade, the Forum has served as one of the premiere venues for business leaders to engage in debate and dialogue on the effects of developments in the capital market on corporate governance. This year’s Forum will focus on the board-centric model of corporate governance functioning in an array of shareholders. Speakers and panels will explore how changing expectations and dynamics in the capital markets impact the way boards govern.
Along … Read more
Arbitration as a means of dispute resolution is intended to help consumers and businesses save time and money and achieve fair results when compared to traditional litigation. Millions of contracts for consumer financial products and services have a pre-dispute arbitration clause (“arbitration clause”) that requires consumers and financial institutions to resolve their disputes through arbitration, rather than through the court system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to study arbitration agreements and submit its findings in a report to Congress (“CFPB Study”).[i] In sharp contrast … Read more