Wednesday, April 14, 2021
Dear BLPB Readers:
Wharton Professors David Zaring and Peter Conti-Brown share that:
Wednesday, March 24, 2021
I always learn a ton in reading Professor Julie Andersen Hill's banking articles. A TON! Hence, I'm excited to see that she recently posted her new piece, Cannabis Banking: What Marijuana Can Learn from Hemp (forthcoming 2021, Boston University Law Review). This is her second article on cannabis banking, the first being an excellent symposium piece, Banks, Marijuana, and Federalism. As both houses of Congress have recently reintroduced the SAFE Banking Act, these articles couldn't be more timely. Here's the abstract for Cannabis Banking:
Marijuana-related businesses have banking problems. Many banks explain that because marijuana is illegal under federal law, they will not serve the industry. Even when marijuana-related businesses can open bank accounts, they still have trouble accepting credit cards and getting loans. Some hope to fix marijuana’s banking problems with changes to federal law. Proposals range from broad reforms removing marijuana from the list of controlled substances to narrower legislation prohibiting banking regulators from punishing banks that serve the marijuana industry. But would these proposals solve marijuana’s banking problems?
In 2018, Congress legalized another variant of the Cannabis plant species—hemp. Prior to legalization, hemp-related businesses, like marijuana-related businesses, struggled with banking. Some hoped legalization would solve hemp’s banking problems. It did not. By analyzing the hemp banking experience, this Article provides three insights. First, legalization does not necessarily lead to inexpensive, widespread banking services. Second, regulatory uncertainty hampers access to banking services. When banks were unsure what state and federal law required of hemp businesses and were unclear about bank regulators’ compliance expectations for hemp-related accounts, they were less likely to serve the hemp industry. Regulatory structures that allow banks to easily identify who can operate cannabis businesses and verify whether the business is compliant with the law are more conducive to banking. Finally, even with clear law and favorable regulatory structures, the emerging cannabis industry still presents credit, market, and other risks that make some banks hesitant to lend.
Wednesday, March 10, 2021
"I'm no civ-pro geek," I confessed today at a research presentation by OU College of Law colleagues Professors Steven Gensler and Roger Michalski on their recent article, The Million Dollar Diversity Docket. But I also shared having been immediately intrigued by their paper after reading its abstract. And I am even more so now after today's presentation. Diversity of citizenship jurisdiction is, of course, a tremendously important subject for both business lawyers and business litigation. So, even if like me, civil procedure generally isn't your thing, check out their fascinating project! Here's the article's Abstract:
What would happen if Congress raised the jurisdictional amount in the diversity jurisdiction statute? Given that it has been almost 25 years since the last increase, we are probably overdue for another one. But to what amount? And with what effect? What would happen if Congress raised the jurisdictional amount from the current $75,000 to $250,000 or, say, $1 million?
Using a novel hand-coded data set of pleadings in 2900 cases, we show that the jurisdictional amount is not a neutral throttle. Instead, different areas of law, different parts of the country, and different litigants are more affected by changes in the jurisdictional amount than others. Our findings thus provide new guidance for Congress to consider when evaluating proposed changes to the amount threshold.
We build from our data to explore different ways Congress could use the amount in controversy lever to adjust the diversity docket, ranging from traditional techniques like incremental inflation-adjustments to radical experiments with lotteries or replacing the amount in controversy minimum with a maximum. Our analysis of the options highlights the normative choices Congress makes when deciding which cases to bless and curse with a federal forum. Thus, our study also provides a new window into the longstanding debates about the existence and reach of diversity jurisdiction. We hope our empirical work will inform these debates and enable a new wave of scholarship on the basic functions and functioning of the federal diversity docket.
Wednesday, March 3, 2021
I recently had the good fortune to hear Professor Jonathan R. Macey speak about his insightful and timely new article, Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare (forthcoming, Texas Law Review). I wanted to highlight it to readers and share the Abstract:
Access to credit can provide a path out of poverty. Improvidently granted, however, credit also can lead to financial ruin for the borrower. Strangely, the various regulatory approaches to consumer lending do not effectively distinguish between these two effects of the lending process. This Article develops a framework, based on the household balance sheet, that distinguishes between lending that is welfare enhancing for the borrower and lending that is potentially (indeed likely) ruinous, and argues that the two types of lending should be regulated in vastly different ways.
From a balance sheet perspective, various kinds of personal loans impact borrowers in vastly different ways. Specifically, there is a difference among loans based on whether the loan proceeds are being used: (a) to make an investment (where the borrower hopes to earn a spread between the cost of the borrowing and the returns on the investment); (b) to fund capital expenditures (homes, cars, etc.); or (c) to fund current consumption (medical care, food, etc.). From a balance sheet perspective, this third type of lending is distinct. Such loans reduce wealth and are correlated with significant physical and mental health problems. In contrast, loans used to acquire capital assets (i.e. houses) are positively correlated with such socioeconomic indicators.
Payday loans are the paradigmatic example of the use of credit to fund current consumption. Loans to fund current consumption reduce the wealth of the borrower because they create a liability on the “personal balance sheet” of the borrower, without creating any corresponding asset. The general category of loans to fund current consumption includes both loans used to fund unforeseen contingencies like emergency medical care or emergency car repairs, and those used to make routine purchases. Consistent with the stated justification for creating these lending facilities, which is to serve households and communities, the emergency lending facilities of the U.S. Federal Reserve should be made accessible to individuals facing emergency liquidity needs.
Loans that are taken out for current consumption but are not used for emergencies also should be afforded special regulatory treatment. Lenders who make non-emergency loans for current consumption should owe fiduciary duties to their borrowers. Compliance with such duties would require not only much greater disclosure than is currently required. It also would impose a duty of suitability on lenders, which would require lenders to provide borrowers with the loan most appropriate for their needs, among other protections discussed here. These heightened duties also should be extended to borrowers when they take out a loan that increases the debt on a borrower’s balance sheet by more than 25 percent.
Wednesday, February 24, 2021
Truth be told, I don't know a whole lot about SPACs. HOWEVER, I've been encountering this topic frequently these days, whether I'm following clearing and settlement news such as Ex-Cosmo editor teams up with ice hockey owner in Spac deal or doing my daily glance at the FT and reading about Why London should resist the Spac craze. Wanting to be more in the know, I've just added Michael Klausner, Michael Ohlrogge & Emily Ruan's "A Sober Look at SPACs" to my reading list. Here's the abstract:
A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure. We find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation. We nonetheless propose regulatory measures that would eliminate preferences SPACs enjoy and make them more transparent, and we suggest alternative means by which companies can go public that retain the benefits of SPACs without the costs.
Wednesday, February 17, 2021
In August 2020, Citibank, as administrative agent for a syndicated loan to Revlon, Inc., accidently wired nearly $900 million to lenders. It had intended to send a $7.8 million interest payment. Some of the lenders refused to return the money. Not surprisingly, Citibank was not happy about this. Yesterday, U.S. District Judge Jesse M. Furman issued a ruling denying Citibank's attempt to recoup the funds. As it turns out, under NY law, keeping money wired by mistake generally amounts to conversion or unjust enrichment. However, under the discharge-for-value defense, “The recipient is allowed to keep the funds if they discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake.”
Wednesday, February 10, 2021
Co-blogger Joan Heminway predicted that GameStop Will Be 2021's Great Gift To Business Law Professors. Totally agree. I think it’s also a great gift to those of us who research financial market infrastructure, particularly clearing and settlement. This episode has highlighted the importance of clearinghouses. In the past, I’ve written several posts on clearinghouses (for example, here, here, here). In preparing to speak on this topic during the UT Law roundtable last week, I came across several great articles about the role of clearinghouses and margin calls in the Robinhood/GameStop story. I share a few of these below with readers.
Keep in mind that the DTCC’s clearinghouse, the National Securities Clearing Corporation (NSCC), was designated in 2012 by the Financial Oversight Stability Council (FSOC) as one of eight designated financial market utilities under Dodd-Frank's Title VIII. These designated FMUs are single points of failure in financial markets. I've written extensively about Title VIII, beginning with The Federal Reserve as Last Resort.
Jeff John Robert’s Fortune article: The real story behind Robinhood’s decision to restrict GameStop trading – and that 4 a.m. call to put up $3 billion.
Telis Demos’ WSJ article: Why Did Robinhood Ground GameStop? Look at Clearing
Stephen G. Cecchetti & Kim Schoenholtz’s blog post, GameStop: Some Preliminary Lessons
Robinhood’s post on “What Happened this Week”
Wednesday, February 3, 2021
Dear BLPB readers:
The Wharton School of the University of Pennsylvania will host its annual Wharton Financial Regulation Conference on April 16, 2021, virtually. The conference will include keynote addresses from Greg Ip, Chief Economics Commentator, The Wall Street Journal, and an as-yet confirmed senior policymaker in financial regulation.
We issue a call for papers to any scholars from any discipline—law, economics, political science, history, business, and beyond—to submit papers on any topic related to financial regulation, broadly construed. Special attention will be paid to junior scholars and those new to the financial regulation community, but we welcome all submissions, including from those who have presented before. Here's the complete announcement: Download 2021 FinReg Call for Papers
Wednesday, December 30, 2020
BLPB readers, I hope that everyone is enjoying the holiday season and the semester break! I also want to get an early start on wishing everyone a HAPPY NEW YEAR!!!
Before we leave 2020, I wanted to share that if you missed Bank Supervision: Past, Present, and Future, a stellar virtual conference hosted by the Federal Reserve Board of Governors, Harvard Law School, and the Wharton School on December 11, you can still access the conference materials here. There's lots of great stuff, including four literature reviews (below) that banking law profs researching in this area are certain to find helpful. Enjoy! And a big shout-out to the hosts for such a successful event!
Literature Review on Economics: Beverly Hirtle, Banking Supervision: The Perspective from Economics
Literature Review on Law: Julie Andersen Hill, Bank Supervision: A Legal Scholarship Review
Literature Review on History: Sean H. Vanatta, Histories of Bank Supervision
Wednesday, December 23, 2020
Dear BLPB Readers:
The University of Oklahoma College of Law
Associate Professor of Law
The University of Oklahoma College of Law seeks outstanding applicants, either entry level or pre-tenure lateral, to fill a full-time tenure-track position to begin fall semester 2021. Successful applicants must have a J.D. or equivalent academic degree, strong academic credentials, a commitment to excellence in teaching, and demonstrably outstanding potential for scholarship. We welcome candidates in all subject matter areas, with particular interest in filling curricular needs that include criminal law, family law, constitutional law, wills and trusts, bankruptcy, and real estate transactions. Complete announcement is here: Download OULaw_TenureTrackHiringAnnouncement
Wednesday, December 9, 2020
In doing my weekly SSRN search, I was absolutely delighted to see Professor Ron Berndsen’s Five Fundamental Questions on Central Counterparties (here) (note: these institutions are sometimes also referred to as CCPs or clearinghouses). Berndsen has produced an extensive and invaluable review of the “booming literature on CCPs, of which about 60% is published in the last five years.” As he notes, this area “can be considered as the most important niche of financial economics.”
Berndsen organizes the review through “asking five fundamental questions about CCPs.” Table 6 on p.30 (copied below) provides these questions and shortened answers.
I am grateful to Berndsen for writing this article, proposing future research topics based on his extensive review of the literature, and providing a comprehensive bibliography (even if it has increased my "to read" list!). An abstract of the article is below:
Central counterparties (CCPs) are designed to reduce aggregate counterparty credit risk and function as market infrastructures for capital markets in securities and derivatives. Although CCPs, also known as clearing houses, exist for well over a century, they have gained prominence since they became the main international public policy response to the Lehman crisis of making over-the-counter derivative transactions safer. This G20's response to the Lehman crisis of making central clearing mandatory for standardized over-the-counter derivative transactions has been translated into law, Dodd-Frank for the US and EMIR for the EU. However, CCPs remain to some extent controversial with adversaries claiming that they potentially increase systemic risk and proponents viewing them as systemic risk reducing when properly designed and maintained. In this article I review the booming literature on CCPs, of which about 60% is published in the last five years, by asking five fundamental questions about CCPs. The aim is to construct a broad, academically substantiated, synthesis about CCPs and to propose directions for future research in what can be considered as the most important niche of financial economics.
Wednesday, December 2, 2020
Over the summer, I had the good fortune of hearing Professor Christina Parajon Skinner present her important and timely work on Central Banks and Climate Change. I was thrilled to see that this article was recently posted to SSRN (here) and I'm reading it now! Here's the abstract:
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 to deter banks from lending to climate-unfriendly business. Politicians and academics alike have urged climate risk as both macroeconomic and financial stability risk. Nevertheless, in the U.S., the Federal Reserve has been measured in its response to climate change.
This article considers the scope of the Fed’s policy and legal authority to address climate change. Drawing on insights from corporate finance and macroeconomics, the article first considers how climate risk presents risks that are policy problems for the Fed. From that policy basis, the article constructs a legal framework — stitching together a variety of Fed laws, regulations, and precedents of practice — to discern where the Fed can legitimately move forward on climate change and the areas that, at present, sit outside the Fed’s legal remit.
The article concludes that the Fed’s authority to address climate change is strongest in a responsive posture — that is, to respond to climate-related economic shocks and to tailor supervision to better account for encroaching operational risks and asset-quality deterioration. However, the Fed lacks a solid legal basis for seeking to proactively make the financial system greener. Ultimately, the article prompts some reflection on the ideal role of the Fed vis-à-vis the fiscal authority of the Treasury, the political actors in Congress, and the Executive.
Wednesday, November 18, 2020
Yesterday, the Financial Stability Board (FSB) released a report: Holistic Review of the March Market Turmoil (Report). It contains lots of really interesting information and is well worth a read (for a quick overview, there’s an Executive Summary and a two minute YouTube video of Randal K. Quarles, FSB Chair and a Governor of the Federal Reserve System, discussing the Report).
I thought its emphasis on the increasingly central role of market liquidity to financial market resilience particularly important. Today, both the traditional, highly regulated banking system and the market-based credit system provide credit to the economy. These systems are interconnected and roughly equivalent in size. Although the market-based credit system – non-bank financial intermediation (NBFI) – looks, smells, and acts like banking, it is not similarly regulated nor does it have access to deposit insurance or the Federal Reserve’s lender of last resort liquidity facility. Nevertheless, in the financial crisis of 2007-09 and this past March, the Federal Reserve provided extraordinary liquidity and other support to the NBFI to promote financial stability and address bank-like runs.
On p.2, the Report notes that “The need to intervene in such a substantial way has meant that central banks had to take on material financial risk. This could lead to moral hazard issues in the future, to the extent that markets do not fully internalise their own liquidity risk in anticipation of future central bank interventions in times of stress.” The Report explains on p.33 just how extensive this recent central bank support was: “Overall, these measures lead to a US$7 trillion increase in G7 central bank assets in just eight months (Graph 5.1). In contrast, G7 central bank assets only rose by about US$3 trillion in the year following the collapse of Lehman Brothers in 2008.”
The market-based credit system underprices liquidity risk. Measures must be taken to address this significant issue. As I wrote in The Federal Reserve As Last Resort (footnotes removed from quote):
Liquidity is not free. Liquidity risk is one of the fundamental risks in financial markets. All else being equal, liquid financial assets are less risky than illiquid ones and, therefore, worth more. Financial investors generally expect to receive a "liquidity premium" for illiquid financial assets. In the past, however, both economic and financial theories have sometimes treated liquidity as costless. And international financial institutions have long mismanaged and mispriced liquidity risk. Not surprisingly, liquidity assistance emerged as one of the most sought-after remedies provided by the Federal Reserve and central banks around the world during the financial crisis.
On p.50, the Report states that “Taken together, the measures introduced [by central banks] essentially removed risk from investors and transferred it to the balance sheet of central banks and hence of the public sector as a whole.” I’m excited for the FSB’s upcoming “work programme” on NBFI (see p.3 of the Report for details), and hope that in the future, investors will be required to retain more of their contracted for risk and that the resilience of this sector greatly improves.
Wednesday, November 11, 2020
BLPB Readers, below are hiring announcements of the Kelley School of Business at Indiana University:
Tenure Track Posting
The Kelley School of Business at Indiana University seeks applications for a tenured/tenure-track position in the Department of Business Law and Ethics, effective fall 2021. The candidate selected will join a well-established department of 26 full-time faculty members who teach a variety of courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. It is anticipated that the position will be at the assistant professor rank, though appointment at a higher rank could occur if a selected candidate’s record so warrants. Complete posting here: Download BLE tenure-track ad (to start fall 2021)
Lecture (non tenure track) Posting
The Kelley School of Business at Indiana University seeks applications for a full-time, non-tenure-track lecturer position in the Department of Business Law and Ethics, effective fall 2021. The candidate selected will join a well-established department of 26 full-time faculty members who teach a variety of residential and online courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. Lecturers have teaching and service responsibilities, but are not expected to engage in research activities. Complete posting here: Download BLE Lecturer ad (to start fall 2021)
In today's post, I thought I'd share with BLPB readers a few tidbits of information that caught my eye this morning:
1) Today, the Financial Stability Board (FSB) released the "2020 list of global systemically important banks (G-SIBs)." Topping the list of 30 are Citigroup, HSBC, and JP Morgan Chase.
2) The FSB also recently released a discussion paper for public consultation: Regulatory and Supervisory Issues Relating to Outsourcing and Third Party Relationships. Reading it has now been added to my "do to list" as it addresses issues such as banks' reliance on cloud computing, a topic I wrote about in Banking on the Cloud (w/David Fratto and Lee Reiners), an article for last year's BLPB symposium.
3) Bill Ackman, CEO of the hedge fund Pershing Square, is "hedging the pandemic again."
4) Ok, so this one didn't really catch my eye so much as I went looking for it! I'm working on finishing this year's BLPB symposium article... Huang and Takát's The CCP-bank nexus in the time of Covid-19 shares the happy news that despite the intense market volatility of March 2020, clearinghouses performed well. However, procyclical margin calls by clearinghouses did create liquidity squeezes during this time of market stress. The authors state that "Going forward, the interaction of CCPs [clearinghouses] with clearing member banks is critical ("CCP-bank nexus"). Importantly, actions that might seem prudent from an individual institution's perspective, such as increasing margins in a turmoil, might destabilise the nexus overall. Therefore, central banks need to assess banks and CCPs jointly rather than in isolation." Sounds incredibly wise to me!
Wednesday, November 4, 2020
Michigan Law School 2021 Junior Scholars Conference
April 16-17, 2021
Call for Papers
Deadline for Submission: January 4, 2021
The University of Michigan Law School is pleased to invite junior scholars to attend the 7th Annual Junior Scholars Conference which will take place virtually on April 16-17, 2021. The conference provides junior scholars with a platform to present and discuss their work with peers and receive feedback from prominent members of the Michigan Law faculty. The Conference aims to promote fruitful collaboration between participants and to encourage their integration into a community of legal scholars. The Junior Scholars Conference is intended for academics in both law and related disciplines. Applications from graduate students, SJD/PhD candidates, postdoctoral researchers, lecturers, teaching fellows, and assistant professors (pre-tenure) who have not held an academic position for more than four years, are welcomed.
Complete call for papers Download Cfp Michigan Law School 2021 Junior Scholars Conference.
Wednesday, October 7, 2020
Securities Financing and Derivatives Markets Interconnections and Potentials for Greater Transactional Efficiencies
I just did a quick read through ISDA’s new whitepaper, Collaboration and Standardization Opportunities in Derivatives and SFT Markets. “SFT” stands for securities financing transactions. I encourage anyone studying these markets to at least review its Executive Summary. As it states “This paper explains and illustrates how and why two large, important and interconnected markets – derivatives and securities financing transactions (SFTs) – could collaborate to achieve greater standardization and improved efficiency.” (p. 3)
It's divided into two parts: 1) an overview of the relevant markets (repo, stock loan, and derivatives), their interconnectedness, and possibilities for and benefits of greater transactional efficiencies, and 2) a proposal for implementing these objectives.
Much of the paper focuses on market interconnections, which strongly argue for the possibility of improved transactional efficiencies. I kept thinking about interconnections from a systemic risk/financial stability perspective, and how (if at all) promoting greater transactional efficiencies (which, at least at first glance, seems like a good idea) might impact such considerations.
I encourage more of us in the banking and financial institutions area to give additional thought to systemic risk and financial stability issues related to securities lending, including due to its interconnections with derivatives markets. For example, while there has been much written about AIG’s CDS problems in the 2007-08 financial crisis, comparatively little work has addressed the securities lending issues it had (for example, see Securities Lending and the Untold Story in the Collapse of AIG). Nevertheless, “Participants in the SFT and derivatives markets have traditionally overlapped. Banks (including investment banks, commercial banks and central banks), prime brokers, funds (including hedge funds, pension funds and sovereign wealth funds) and market infrastructures (such as clearing houses) are among the biggest players in both the derivatives and SFT markets.” (p. 12)
Well, once I finish my article on NCWOL claims for clearinghouse shareholders for the upcoming BLPB Virtual Symposium, maybe I’ll turn my attention to clearinghouses and securities lending. I’d also love to see more work in this area by BLPB readers, and if you’ve an article related to these topics, please do send it my way!
Tuesday, October 6, 2020
Exciting news! On the morning of October 14, 2020, the Systemic Risk Council is offering a webinar on Ensuring Financial Stability: Relaunching the Reform Debate After Pandemic Dislocation. The Agenda looks fantastic! A brief summary of the program is below:
The stimulus response to the global pandemic has surfaced new debates and highlighted lingering questions about the role of central banks, accountability, reform, and the roles of levered markets and shadow banking. This Systemic Risk Council program brings together leading voices to explore how the financial industry, regulators, and policy makers can address key issues around bank stability, resolution, and the mounting leverage in the global economic system.
Monday, October 5, 2020
The fourth annual Business Law Prof Blog symposium, Connecting the Threads, is happening, despite the pandemic. We are proceeding in a virtual format, hosted on Zoom on Friday, October 16. More information is available here.
The line-up includes an impressive majority of our bloggers speaking on a wide range of topics from shareholder proposals to social enterprise, opting out of partnership, and much more. Most papers will have a faculty and student discussant. My submission, “Business Law and Lawyering in the Wake of COVID-19,” is coauthored with two students and carries one hour of Tennessee ethics credit. While I wish we could host everyone in person in Knoxville, it always is an amazing day when we all get together. I look forward to learning more about what everyone is working on and hearing what everyone has to say.
Wednesday, September 30, 2020
This Friday, Professor Art Wilmarth’s new book, Taming the Megabanks: Why We Need a New Glass-Steagall Act (Cambridge University Press), will be released. Wilmarth recently published an overview of his work on Duke Law School’s FinReg Blog, a paragraph of which is below:
Taming the Megabanks contends that we must adopt a new Glass-Steagall Act to separate banks from securities markets. A new Glass-Steagall Act would restore financial stability and ensure that our financial system serves Main Street business firms and consumers instead of Wall Street speculators. Universal banks would be broken up and would no longer dominate our financial system. Shadow banks would shrink substantially because they could no longer fund their activities by offering short-term financial instruments that function as substitutes for deposits. A more decentralized and competitive financial system would provide better services to commerce, industry, and society.
I’m really looking forward to receiving my copy, purchased for a very reasonable $34.95! I’ve read many of Wilmarth’s articles, and I’ve always learned a lot from each one. A LOT!