Stress Testing During a Pandemic

Yesterday, the Federal Reserve announced the results of its annual stress tests. This was the first time since 2009 that the Fed had stress tested large banks during a period of systemic distress. In a new paper, Stress Testing During Times of War, forthcoming in The Stress Test Handbook (Cambridge University Press) and available here, I explain why stress testing after a negative shock is both more important and more fraught than stress testing during times of peace. I further address why time-limited government backstops may be critical to ensuring the tests are robust, relevant and disclosed – … Read more

Cleary Gottlieb Discusses OCC’s Proposed Updates to Digital Banking, Bank Activity Rules

On June 4, the Office of the Comptroller of the Currency published a Proposal to update rules applicable to the activities and operations of national banks and Federal savings associations.  Comments on the Proposal are due August 3.  Simultaneously with the Proposal, the OCC released an Advance Notice of Proposed Rulemaking requesting comment on expanding, updating and improving the regulations and interpretations on digital and electronic activities.  The ANPR is quite open-ended, and we anticipate that comments are likely to take many forms, from direct responses to white papers and research analyses.  Comments on the ANPR are also requested … Read more

Cleary Gottlieb Discusses Fed’s Main Street Lending Program

On May 28, the Federal Reserve published the structural and operational details of the Main Street Lending Program, releasing program documentation and updated FAQs.  These documents are the final remaining pieces before the facilities open.  Last week’s publication brings the Federal Reserve closer to a new frontier, where it will be able to lend against non-investment grade credits to small and mid-size nonfinancial corporates.  Depending on uptake by eligible Lenders and Borrowers, the Main Street Lending Program has the potential to be an important supplement to the Paycheck Protection Program in supporting sectors of the economy most affected by the … Read more

The Limits of the G20’s Debt Service Suspension Initiative

As of May 1, G20’s Debt Service Suspension Initiative (DSSI) for 76 International Development Association (IDA) countries and least developed countries (LDCs) has become operational. However, it remains unclear whether private-sector creditors will collaborate on such efforts for those countries, and the question on what to do about the much larger debts of low- and middle-income countries is still open.

On April 15, the G20 announced the DSSI, which is an eight-month official bilateral sovereign debt payment suspension if requested by World BankIDA countries and least developed countries (LDCs) that are current on their International Monetary Fund (IMF) and World … Read more

Which Companies Crowdfund?

The JOBS Act and Regulation Crowdfunding were intended to create a new and inclusive type of online capital market where all entrepreneurs, regardless of their physical location, gender, or anything else, can go directly to the public (the “crowd”) to raise capital for their early-stage startup companies.  Has it met this goal?

To answer this question, my research assistant and I created an original data set using every Form C (the official form that all crowdfunding issuers must file with the SEC) from 2016 to 2018 – roughly 1,500 filings in all.  Our results are reported in a recently published Read more

The Phenomenon of the Television Ad as Investment Tip

Amid the turbulence in stock markets, retail investors continue to look for investment ideas. With thousands of publicly-traded stocks available, many retail investors often resort to their recent personal experiences when deciding on which stocks to buy or sell. Maybe a surge in video conferencing or home deliveries will prompt them to invest in companies involved in those businesses. They could even be inspired by ads they see on TV.

In a recent paper, we find a predictable, recurring, and robust pattern between investor exposure to television commercials and subsequent retail stock trading. We find that, within 15 minutes of … Read more

Executive Override of Central Banks in the United States and the United Kingdom

What makes a central bank “independent?” As most central bank scholars and policy-makers would likely answer that question, “it depends” – it depends on the bank, the function it is performing, and the political-economy of the times.  Still, as complicated as the concept of central bank independence is, many experts could likely agree on at least one indicium of independence: a central bank’s legal freedom to make certain decisions free from executive branch interference – at least where certain of its core functions, like monetary policy, are concerned.

In a recent article, we compare the way that two different legal … Read more

Why Many Small Companies Have So Far Missed Out on the Paycheck Protection Program

The Paycheck Protection Program (PPP) is a critical part of the CARES Act, which helps individuals and organizations ride out Covid-19’s initial damage to the U.S. economy. PPP provides for loans to small businesses, and Congress should focus on keeping money available and making it easier for small businesses without pre-existing bank relationships to get loans. (One way to do that would be to waive the anti-money-laundering rules and instruct bank regulators to create a comprehensive online list of lenders willing to make PPP loans to new clients).

Instead, the PPP is beset by controversy. Big restaurant chains like Ruth’s … Read more

Fed to the Rescue: Unprecedented Scope, Stretched Authority

When it comes to responding to the coronavirus outbreak in the U.S., the Federal Reserve has emerged as one of the most active institutions at the national level. Its bold and timely interventions have halted a monetary breakdown that would have guaranteed a second Great Depression. And its continuing efforts to avert a vicious cycle of debt defaults are helping to address a sudden economic stop that has made a deep and lasting recession all but inevitable. Unfortunately, the Fed has repeatedly had to scramble and stretch its authority because it was not designed to address the current crisis. In … Read more

How Benchmark Competition Would Benefit Financial Markets

In over-the-counter (OTC) markets for assets such as currencies, derivatives, and commodities, staggering sums of money are tied to single, critical financial benchmarks.  The London Interbank Offered Rate (LIBOR), for example – often referred to as “the world’s most important number” – determines interest payments on instruments ranging from student loans and mortgages to synthetic derivatives across the globe.  In 2016, estimates of notional exposure to U.S. dollar LIBOR totaled about $200 trillion – 10 times U.S. GDP that year.  The WM/Reuters foreign exchange benchmark is another example.  Its impact extends to retirement funds and stock markets, where pension funds … Read more

How Nudges Can Help Regulate New Technologies

New technologies are being introduced in markets around the globe.  Disruptive innovations such as blockchain, cryptocurrencies, the Internet of things, automated cars and other products that support decision-making based on artificial intelligence (AI) are offering a creative take on traditional markets. Yet these technologies frequently require regulatory intervention to protect consumers or prevent systemic risks. One of the main challenges for regulating new technologies is insufficient technological knowledge by the regulators. The industry is invariably more informed about the subject matter than the regulators and is more likely to tailor regulation by private ordering. In these circumstances, we argue, “nudge” … Read more

How Banks and Fintechs Can Help Small Businesses Survive COVID-19

Small business assistance has been a central focus of the government’s response to the COVID-19 crisis, and for good reason. Small businesses underlie the vitality of our neighborhoods, spark innovation, and employ almost one-half of the U.S. workforce. In a new working paper, “How to Help Small Businesses Survive COVID-19,” available here, we explain why finding better ways to harness banks and fintechs is critical if this vital part of the economy is to emerge without too much harm on the far side of this crisis.

There is no easy way for the government to readily provide the perfect … Read more

Wall Street CARES!: Who Gets the Hidden Subsidies Under the CARES Act?

The CARES Act was passed under intense pressure and with minimal transparency. The consequence of this opaque process is that there are some surprising windfalls. No criticism is here expressed of the act’s purpose, but Wall Street knows one thing about federal subsidies: Charity begins at home.

The centerpiece of the CARES Act is Section 1102’s “Paycheck protection program,” which will make available some $349 billion to be lent to small businesses in loans guaranteed by the Small Business Administration (“SBA”).[1] These loans will carry a very low 1% interest rate, and the expectation is that most of the … Read more

Paul Weiss Discusses the Scheduled End of LIBOR

Notwithstanding numerous COVID-19-related challenges faced by market participants, UK regulators have affirmed that—at least for now—the anticipated cessation of the London Interbank Offered Rate (“LIBOR”) at the end of calendar year 2021 remains unchanged. Complying with regulators’ and working groups’ recommendations for reducing LIBOR exposure and transitioning to alternative reference rates, such as the Federal Reserve Bank of New York–endorsed Secured Overnight Financing Rate (“SOFR”) for USD LIBOR instruments, may prove even more challenging than originally anticipated.[1]

The escalating COVID-19 health crisis and accompanying global markets volatility has forced many companies to pivot their resources towards immediate priorities such … Read more

Are ETFs Making Some Asset Managers Too Interconnected to Fail?

Exchange traded funds (ETFs) sit at the center of the COVID-19 crisis selloff.[1]  This isn’t surprising, since ETFs are a low-cost highly liquid vehicle for trading entire sectors, asset classes, and even global economies.  Yet the use of ETFs as a preferred crisis trading tool, and the Federal Reserve’s unprecedented mid-crisis purchasing of bond ETFs,[2] reinvigorates a long-standing debate on the systemic importance of ETF sponsors.

In a new article, I argue that the largest ETF sponsors are becoming systemically important due to interconnectedness – a material factor in the 2008 global financial crisis (GFC).  Although large … Read more

Cleary Gottlieb Discusses Fed’s Final “Stress Capital Buffer”

On March 4, the Federal Reserve finalized a significant integration of its stress testing regime with its ongoing supervisory capital requirements, by introducing a new “stress capital buffer” requirement for firms subject to the Federal Reserve’s CCAR supervisory stress tests.  An institution-specific stress capital buffer will be determined for each CCAR firm as part of the 2020 CCAR exercise and is intended to take effect October 1, 2020.  However, given the uncertainty and stress in the market caused by COVID 19 mitigation measures, it remains to be seen whether the Federal Reserve could modify the implementation timeline.

The Federal Reserve’s … Read more

Operational Failures and Financial Crises

Past financial crises have been characterized by panics, runs, and restrictions on the availability of credit, and our crisis prevention measures (including capital regulation, deposit insurance, and the lender of last resort) have been adopted in light of this historical experience.[1]  These forms of financial stability regulation pay limited attention to operational risks, however, and as the technologies by which financial services are delivered become increasingly complex, operational risks may become a transmission mechanism as well as a source of financial distress.  In the future, financial crises may look more like a rolling blackout than a bank run.

Take … Read more

Congress Should Endorse the Federal Reserve’s Extraordinary Measures

The rapid spread of Covid-19 and massive change in behavior required to curb it have transformed the trajectory of the world’s economy.  Just a few short weeks ago, the United States was basking in the longest period of sustained economic growth on record.  The country now faces what could be the steepest decline in economic activity in its history.  The long-term health of the country and the economy remain fluid and will be determined in part by how policymakers respond.  The Federal Reserve quickly recognized the unprecedented nature of the threat and has intervened aggressively to stem the pain this … Read more

Gibson Dunn Discusses the Coronavirus, Private Equity, and Portfolio Company Finances

With confirmed cases of COVID-19 now in more than 50 countries and the death toll rising almost daily, experts are predicting that the situation will get significantly worse before it gets better. Concerns over the impact of the virus have caused significant volatility in the stock markets over the last week and the potential scale of the impact across a very wide  range  of  industries  is  just  beginning  to  be  realized. Therefore for private equity sponsors now is the time to be checking their financing documents to fully understand how COVID-19 might have an impact on the operations and financial … Read more

Cleary Gottlieb Discusses New SEC Rules on Guaranteed and Collateralized Securities

On March 2, 2020, the SEC adopted rule changes to simplify the financial disclosures that are required when an issuer offers debt securities with guarantees.[1]  The old requirements were complex, and in some circumstances burdensome, and the utility of some resulting disclosures for investors was doubtful.  As discussed below, the new requirements are easier to apply and permit substantially simpler disclosures in some cases.

The SEC also adopted rule changes applicable to a similar, less common situation – securities that are collateralized by a pledge of shares (typically shares of a subsidiary of the issuer).

The new rules have … Read more