Wednesday, July 8, 2020
Yesterday, Randal K. Quarles, the Vice Chair of the Board of Governors of the Federal Reserve System and Chair of the Financial Stability Board (FSB), gave a speech at the Exchequer Club entitled “Global in Life and Orderly in Death: Post-Crisis Reforms and the Too-Big-to-Fail Question” (here). As he notes, the catchy first part of this title harkens back to the 2010 words of Mervyn King, then Governor of the Bank of England, who stated that “most large complex financial institutions are global—at least in life if not in death.” Quarles asserts that “In this pithy sentence, he [King] summed up the challenge policymakers faced.”
The context of Quarles’ speech is the FSB’s recent consultation report: Evaluation of the effects of too-big-to-fail reforms (here). Two major challenges post-crisis banking reforms sought to address were: 1) the market’s assumption that big banks would not be allowed to fail, and the moral hazard this created, and 2) the absence of effective resolution frameworks for global banks, which lead to bank rescues. There’s lots of good news here, including that prior to the current crisis, globally systemically important bank capital ratios had doubled since 2011 to 14%. As a result of this and other reforms, such banks have fared much better in the current crisis, and “[t]his has allowed the banking system to absorb rather than amplify the current macroeconomic shock.” Good news indeed!
At the same time, the challenges of the current crisis are not over. The International Monetary Fund projects that the global economy will contract by 4.9% in 2020 (a steeper decline than with the 2007-08 financial crisis). And Quarles notes that “The corporate sector entered the crisis with high levels of debt and has necessarily borrowed more during the event. And many households are facing bleak employment prospects. The next phase will inevitably involve an increase in non-performing loans and provisions as demand falls and some borrowers fail.”
Corporate and consumer bankruptcies are almost certain to increase as a result of the current crisis. Should a wave of such bankruptcies materialize, this could lead not only to a broader financial crisis, but also to the overwhelming of bankruptcy courts, including a need for additional bankruptcy judges (here). In the U.K., banks have been told to “rethink handling of crisis debt” (here), and the need for related, effective dispute resolution systems has also been noted.
Once again, the necessity of effective resolution frameworks is likely to be front and center in banking regulation. However, this time, it is likely to be a need for effective dispute resolution frameworks so that banks can speedily deal with consumer and corporate bankruptcies to promote economic recovery.
Wednesday, July 1, 2020
Yesterday, the Bank for International Settlements (BIS), whose ownership consists of 62 central banks, released its Annual Economic Report (here). It’s a treasure trove of information for banking and financial market regulation types (like me!) and includes a plethora of informative data and graphs. It’s divided into three main parts: 1) A global sudden stop, 2) A monetary lifeline: central banks’ crisis response, and 3) Central banks and payments in the digital era. Definitely well worth reading!
Wednesday, June 24, 2020
The Emory Corporate Governance and Accountability Review (ECGAR) is currently accepting submissions to be considered for publication in our next volume (8). Submissions are accepted and reviewed on a rolling basis until the end of September. ECGAR is a publication that welcomes articles and submissions that touch on corporate governance.
The full details of this call for submissions can be found here: Download ECGAR Call for Submissions .
Sunday, June 21, 2020
On p. 17 of Rules for Principles and Principles for Rules: Tools for Crafting Sound Financial Regulation (here), Heath P. Tarbert, the Chairman and Chief Executive of the Commodity Futures Trading Commission, provides a useful table that he notes “is intended to be a helpful reference point for regulators confronted with finding the appropriate balance between principles and rules.” I found myself thinking of how helpful a table like this – and the article in general – would have been when I was teaching courses focused on the regulation of financial markets!
I highly recommend this very readable work to BLPB readers, especially to those teaching in the area of regulation. In fact, I’d likely make this article assigned reading if I were teaching a course on financial regulation this fall. It does an excellent job of providing an overview of the strengths and weaknesses of principles-based versus rules-based approaches to regulation and discussing hybrid possibilities. It also examines four categories of factors that suggest taking one approach over the other (summarized in the p.17 table), and applies these factors to several areas (automated trading, position limits, cross-border regulations, and digital assets).
Monday, June 15, 2020
The full schedule for the 2020 National Business Law Scholars Conference, which is being hosted on Zoom Thursday and Friday of this week, is now available. You can find it here. If and as additional changes are necessary, we will re-post.
As is always the case, the conference includes folks presenting work in a variety of areas of business law. These traditional paper panels are the heart of the conference. In addition, as I noted in my post last week, we are including three plenary sessions--one on "Business Law in the COVID-19 Era," one reflecting on teaching business law in the current environment, and one on current bankruptcy law and practice issues. There is something for almost everyone in the business law space in the conference program.
I am pleased and proud to note that several of my fellow bloggers from the Business Law Prof Blog are participating in the conference this year. They include (in addition to me): Colleen Baker, Ben Edwards, Ann Lipton, and Marcia Narine Weldon. I hope many of you will join us for all or part of the program and offer comments to colleagues on and relating to their work.
Sunday, June 7, 2020
In doing a routine SSRN search, I’m always thrilled to see an exciting new banking article! At the top of my “to read list” for this week is Michael Salib & Christina Parajon Skinner’s, Executive Override of Central Banks: A Comparison of the Legal Frameworks in the United States and the United Kingdom (here). For a quick read, the authors have a post on the CLS Blue Sky Blog (here). The article's abstract is here:
This Article examines executive branch powers to “override” the decisions of an independent central bank. It focuses in particular on the power and authority of a nation’s executive branch to direct its central bank, thereby circumscribing canonical central bank independence. To investigate this issue, this Article compares two types of executive over- rides: those found in the United States, exercised by the U.S. Treasury (Treasury) over the U.S. Federal Reserve (the Fed), and those in the United Kingdom, exercised by Her Majesty’s Treasury (HM Treasury) over the Bank of England (the Bank). This Article finds that in the former, the power is informal and subject to minimal formal oversight, whereas in the latter, there are legal powers of executive override within an established and transparent legal framework.
This Article is the first piece of scholarship to undertake comparative analysis of the legal powers of executive override over these two leading central banks. The comparison is indeed striking—it juxtaposes the express, but limited, legal powers of HM Treasury to direct the Bank of England with the ad hoc and informal conventions of Treasury or presidential control of the Federal Reserve. The comparative analysis begs a paradoxical question in the conception of central bank independence: could a narrowly tailored set of override powers that authorize a treasury, with oversight from the legislature, to direct a central bank in exigent circumstances yield a sturdier form of central bank independence than a system which establishes few or limited legal mechanisms of executive override? Ultimately, this analysis prompts renewed examination of the way in which the law structures the Fed’s independence vis-a`-vis the Treasury and the President, informed by lessons from the U.K. design.
Sunday, May 31, 2020
This past week, I had occasion to return to the Financial Stability Board’s (FSB) recent Consultative document, Guidance on financial resources to support CCP resolution and on the treatment of CCP equity in resolution (Guidance), which I wrote a brief post about several weeks ago (here). In doing so, I spent more time thinking about the possibility of clearinghouse shareholders raising “no creditor worse off than in liquidation” (NCWOL) claims in a resolution scenario. I’m struggling with this idea. Shareholders are not creditors. I’ve decided to research this issue more and plan to write a short article. Stay tuned.
The Guidance notes the principle:
that in resolution CCP [clearinghouse] equity should absorb losses first, that CCP equity should be fully loss-absorbing, and that resolution authorities should have powers to write down (fully or partially) CCP equity.
It also notes that:
actions in resolution that expose CCP equity to larger default or non-default losses than in liquidation under the applicable insolvency regime could, based on the relevant counterfactual, enable equity holders to raise NCWOL claims. This may be inconsistent with the other Key Attributes principle that equity should be fully loss absorbing in resolution. This may also raise moral hazard concerns by allowing equity holders to maintain their equity interest in a CCP post resolution while participants are made to bear losses.
Most clearinghouses – for example ICE Clear Credit, a clearinghouse for CDS, and CME Clearing, a clearinghouse within CME Group – are now part of publicly traded global exchange group structures. Historically, clearinghouses were owned by their users/participants. Post Dodd-Frank, some clearinghouses, including the two just noted, have been designated as systemically significant financial market utilities (here).
Over a long period of time, clearinghouses have proven themselves to be robust risk management institutions. However, they can and have failed. Clearinghouses can experience losses due to the default of a clearing member(s), due to non-clearing member default issues (for example, cybersecurity problems, investment or custody losses, operational problems etc.), or due to a combination of both default and non-default issues.
Clearinghouses have rulebooks (contractual arrangements between the clearinghouse and clearing members/participants) that delineate how losses will be handled in the event that a clearing member were to default. Typically, clearinghouse default waterfalls in rulebooks direct that if the defaulting member’s performance bond (initial margin) does not cover its obligations, then a limited amount of funds contributed by the clearinghouse itself would be used to cover losses, and then any remaining losses would be covered by a common default fund which all clearing members are required to contribute to. Were the default fund to be exhausted, rulebooks generally permit clearinghouses to make an additional “cash call” to members. Were losses then still outstanding, the clearinghouse would initiate a recovery process.
Clearing members have called for clearinghouses to put additional capital at risk in this default waterfall structure (here) and to be required to hold additional capital. There is an obvious tension/conflict of interest between clearing members of a publicly traded clearinghouse being largely responsible for default losses and the clearinghouses's shareholders benefiting from the clearinghouse’s profits and managing its risk. Of course, if clearinghouses were owned by their users as they were historically, this conflict of interest would not exist. An alternative to the remutualization of clearinghouses would be for the clearinghouse to be responsible for any default losses that exceeded the defaulting member’s initial margin. From my perspective, this would make a lot more sense. I'm unaware of other examples in which the customers (clearing members) of a publicly traded institution, rather than its shareholders, are responsible for losses created by other customers.
Were a systemically important clearinghouse to become distressed, a resolution authority (RA) could step in – perhaps prior to the completion of the clearinghouse’s recovery process – to ensure the continuity of the clearinghouse’s operations and financial market stability. Systemically important clearinghouses are too critical to fail. Were the RA to take actions resulting in the shareholders experiencing larger losses than they would “in liquidation under the applicable insolvency regime,” there is a concern that such action by the RA could “enable equity holders to raise NCWOL claims.” I would think that this concern would largely disappear if the odd situation of having customers paying for the losses of other customers at a publicly traded institution did not exist or if clearinghouses were owned by their users.
At least for now, in my pre-NCWOL claims by clearinghouse shareholders article world, it’s unclear to me why given that shareholders are not creditors that shareholders would (or should) be able to make credible “NCWOL” claims as shareholders in resolution. I understand that a RA could step in before a clearinghouse recovery process were complete and that shareholders might lose more than they would were the rulebook procedures followed. I also understand that clearinghouse rulebooks generally require clearing members – rather than shareholders – to absorb the majority of the losses from the default of a clearing member. But at the end of the day, shareholders are simply not creditors. Perhaps if it were clear ex-ante that clearinghouse shareholders would be unable to make NCWOL claims in a clearinghouse resolution, it might help to rationalize the incentive conflicts in the clearinghouse area. If clearinghouse shareholders want to make “no shareholder worse off than in liquidation” claims, then the case should be made for that.
Sunday, May 24, 2020
The World Bank and IMF recently released a joint note, COVID-19: The Regulatory and Supervisory Implications for the Banking Sector (here). It’s a great resource for those focused on banking, offering “a set of high-level recommendations that can guide national regulatory and supervisory responses to the COVID-19 pandemic” and “an overview of measures taken across jurisdictions to date.” Annex 1: Overview of Statements and Guidance Provided by Standard-Setting Bodies in Response to the COVID-19 Pandemic is a particularly helpful reference.
Yesterday’s post by Ann Lipton about DoorDash and pizza arbitrage reminded me that food is a really fun, relatable topic for legal/classroom discussion, especially in a transactional or entrepreneurial law course. In the current issue of Food & Wine, I enjoyed “From the Lawyer’s Desk,” a short blurb attached to the article, Positive Partnerships One reason why chefs are partnering with hotels to open restaurants? Risk reduction, in which hospitality lawyer, Jasmine Moy, discussed common chef-hotel partnership deals. Unfortunately, I couldn’t find a link to this for readers, but I did see other legally oriented possibilities (for example, Don’t Open a Restaurant Until You Read This).
Breath. Both Joan Heminway and I have posted about the importance of paying attention to your breath (here). Whether you’re blogging, barbecuing, biking, prepping a summer course or just chilling this weekend, you can’t go wrong in paying attention to your breath: The Healing Power of Proper Breathing.
I want to wish all BLPB readers a very happy, healthy Memorial Day weekend!
Above all this Memorial Day weekend, I want to remember, honor, and thank all of the brave military men and women who died while serving our country.
Sunday, May 10, 2020
Last Monday, the Financial Stability Board (FSB) released the consultative document, Guidance on financial resources to support CCP resolution and on the treatment of CCP equity in resolution (here). As readers know, I’ve written several times about clearinghouses, the central feature of the G20’s reforms to the over-the-counter derivative markets following the 2007-08 crises, implemented in the US in Dodd-Frank’s Title VII (for example, here and here).
The Guidance’s title is a succinct encapsulation of its two-part focus. In the first part, it uses a five-step process to evaluate the adequacy of a CPP’s resources and available tools to support its resolution (were that to prove necessary). These steps include:
Step 1: identifying hypothetical default and non-default loss scenarios (and a combination of them) that may lead to resolution;
Step 2: conducting a qualitative and quantitative evaluation of existing resources and tools available in resolution;
Step 3: assessing potential resolution costs;
Step 4: comparing existing resources and tools to resolution costs and identifying any gaps; and
Step 5: evaluating the availability, costs and benefits of potential means of addressing any identified gaps.
In the second part, the Guidance focuses on how to treat CCP equity in resolution. A resolution of a CCP would be distinct from a “wind down” of the CCP. Readers might ask why one would have to think about such a thing – equity will likely get wiped out, right? Not necessarily. Today, most CCPs are shareholder-owned, but the CCP users/customers (clearing members) are mostly on the hook for any losses resulting from a user’s default. As I’ve written about in Incomplete Clearinghouse Mandates (here), this creates a foundational incentive problem because the shareholders benefit from the CCP’s profits, but the users are primarily responsible for any default losses.
As the Guidance notes, in theory, CCPs could experience losses due to user defaults, non-default issues, or a combination of both. How CCPs owned by shareholders will allocate losses between themselves and users in a “combination” scenario is completely unclear (allocation of non-default losses is also unclear in many cases) and should be addressed as I’ve noted before (here). Should the combination scenario arise, I think loss allocation will prove to be an intractable problem.
In reading the second part of the Guidance, one realizes how complicated and legally fraught the question of CCP equity could be in a resolution given the status quo. Towards the end of the second part, the Guidance states that:
Based on the analysis undertaken in accordance with the previous sections, the relevant home authorities should address the challenges relating to CCP equity fully bearing losses in resolution. This may include, where possible, that home authorities having the relevant powers and authority require that CCPs modify their capital structures, rules or other governance documents in a manner that subordinates shareholders to other creditors or sets out the point at which equity absorbs losses in legally enforceable terms. This may also include identifying or proposing potential changes to laws, regulations or powers of the relevant supervisory, oversight or resolution authorities that would enable achieving the resolution objectives or limit the potential for NCWOL claims.
In the short term, the last sentence of this quote likely offers a more feasible approach to handling CCP equity than what I think would be a more sensible approach: addressing the ownership structure of these institutions. This would almost certainly be much more difficult to implement in practice, but it’s ultimately a simpler, more sensible long-term solution for addressing CCP equity in resolution and for addressing loss allocation under a combination scenario. Until we fix this foundational issue of ownership, we shouldn’t be surprised if the path of a distressed, systemically significant clearinghouse ultimately resembles that of the government‐backed mortgage lenders whose fate more than 11.5 years after entering government conservatorship still remains uncertain. Let’s not repeat this history!
Sunday, May 3, 2020
As I write about derivatives, I’m always excited to see new articles in this area such as Professor Sue Guan’s Benchmark Competition (here; forthcoming, Maryland Law Review). And I was also delighted to learn that we’d overlapped at Wharton (Guan earning a B.S. in 2009 and, me, a PhD in 2010). I’ve had a chance to read about Guan’s intriguing article on Columbia Law School’s Blue Sky Blog (here) and look forward to reading the article soon. Here’s the abstract:
Over-the-counter (OTC) markets—those for currencies, derivatives, swaps, bonds, commodities—make up an immense and critical component of global financial markets. Certain benchmarks, such as the London Interbank Offered Rate (LIBOR), are hardwired throughout these markets and play crucial roles in pricing and valuation. For example, interest payments on instruments ranging from student loans and mortgages to synthetic derivatives are tied to the value of LIBOR. In 2016, estimates of notional exposure to U.S. dollar LIBOR totaled about $200 trillion—ten times U.S. GDP that year. Correspondingly, minuscule variations in a benchmark’s value will impact vast numbers of assets and transactions for hundreds of millions of people.
These benchmarks have become so ubiquitous for an important reason: they have introduced substantial harmonization effects in otherwise decentralized, opaque dealer markets. These benefits fit within the prevailing view of financial regulation: because sophisticated market participants, through wealth-maximizing behavior, tend to select towards structures that maximize efficiency, in aggregate social welfare is maximized, meaning that observed equilibria are likely the most efficient equilibria. And thus, OTC markets have remained largely unregulated for decades.
This Article argues that this understanding is incomplete, and identifies a fundamental misalignment between what is privately optimal and what is socially optimal in OTC markets. By undertaking a novel structural analysis, the Article documents overreliance by market participants on benchmarks even when they are substantially suboptimal. Thus, in contrast to existing reform proposals, which overwhelmingly assume that a single benchmark will continue to dominate, this Article proposes an alternative competitive equilibrium—one where multiple benchmarks compete.
Sunday, April 26, 2020
In his Wednesday post (here), co-blogger Stefan J. Padfield highlighted a recent development in the arbitration area that I also want to bring to readers’ attention. I’m sure that all BLPB readers are a party to an arbitration agreement as these provisions have become so widespread in consumer adhesion contracts. The New York Times recently ran a fascinating article by Michael Corkery and Jessica Silver-Greenberg, ‘Scared to Death’ by Arbitration: Companies Drowning in their Own System. It details an innovative development in which entrepreneurial lawyers “are leaders in testing a new weapon in arbitration: sheer volume,” which is something the current arbitration system can’t handle.
Arbitration provisions in consumer adhesion contracts generally bar class-action lawsuits and might also bar class-wide arbitration. And it often makes little economic sense for an individual to take a large corporation to arbitration. Not surprisingly, many don’t. Corkery and Silver-Greenberg note that “Over the past few years, the nation’s largest telecom companies, like Comcast and AT&T, have had a combined 330 million customers. Yet annually an average of just 30 people took the companies to arbitration…” Now entrepreneurial lawyers such as Teel Lidow, who runs FairShake, and Travis Lenkner at Chicago law firm Keller Lenkner have entered the picture and are shaking up the consumer arbitration area with mass arbitration filings. It’s going to be a really interesting development to watch. It’s also a great reminder to all of the power of entrepreneurial thinking: “ 'The conventional wisdom might say that arbitration is a bad development for plaintiffs and an automatic win for the companies,’ he said. ‘We don’t see it that way.’ ” (Lenkner, as quoted by Corkery and Silver-Greenberg)
Sunday, April 19, 2020
In these unprecedented times, the Federal Reserve is opening unprecedented facilities, including its new Municipal Liquidity Facility. Professor Robert C. Hockett at Cornell Law School has posted a great 3-page paper on this for everyone (like myself) who is interested in quickly learning more about this new Fed program. Check it out here; Abstract is below.
On April 9th the Fed announced it would be opening an unprecedented new Municipal Liquidity Facility (‘MLF') for States and their Subdivisions now struggling to address the nation’s COVID-19 pandemic. This is effectively ‘Community QE’ in all but name. Because Community QE will constitute a literal lifeline to States and their Subdivisions, and will in light of its novelty be as unfamiliar as it is essential, this Memorandum briefly summarizes what the new Facility enables now and will likely enable in future. On this basis it then recommends a three-phase ‘Game Plan’ for States and their Subdivisions to put into operation immediately – that is, April 13th.
Thursday, April 9, 2020
The American Business Law Journal (ABLJ) is a triple-blind peer review journal published quarterly “on behalf of the Academy of Legal Studies in Business (ALSB).” Its articles explore a range of business and corporate law topics, and it is a great resource for academics, industry professionals, and others. Its “mission is to publish only top quality law review articles that make a scholarly contribution to all areas of law that impact business theory and practice…[and it] search[es] for those articles that articulate a novel research question and make a meaningful contribution directly relevant to scholars and practitioners of business law.” I’ve previously posted about the journal (here).
The ABLJ has issued an invitation to ALSB members to apply for the position of Articles Editor. Not currently a member of the ALSB? No worries, you can easily become a member (here)! Below is the complete invitation to apply sent from Terence Lau, the ABLJ Managing Editor.
We invite ALSB members who are interested in serving on the Editorial Board of the American Business Law Journal to apply for the position of Articles Editor. The new Articles Editor will begin serving on the Board in August 2020. Board members serve for six years—three years as Articles Editor, one year as Senior Articles Editor, one as Managing Editor, and one as Editor-in-Chief. Articles Editors supervise the review of the articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. In the case of manuscripts that are accepted, the Articles Editor is responsible for working with the author and overseeing changes in both style and substance. In the case of manuscripts that are believed to be publishable but need further work, the Articles Editor outlines specific revisions and/or further lines of research that should be pursued. The Articles Editors’ recommendations for works-in-process are perhaps the most important and creative aspect of the job because they provide the guidance necessary for such works to blossom into publishable manuscripts. An applicant for the position of Articles Editor should have an established track record of publishing articles in law reviews and should have published at least one article with the ABLJ. Experience serving as a Reviewer for the ABLJ or as a Staff Editor is helpful. Please send a resume and letter of interest to Terence Lau, ABLJ Managing Editor, at email@example.com by May 31, 2020, for full consideration.
Sunday, April 5, 2020
The tenuous link to business law is this…I was blessed to have a phenomenal first-year contracts professor. Over the years, one of my closest friends (also in that course) and I have reminded each other of the professor’s pearls of wisdom about contracts and life. “Life is a marathon, not a sprint,” he would assure us.
I would imagine that many of us feel in the midst of a marathon these days. As another week in these unusual times begins, I was thinking about a few of the lessons I’ve learned in distance running that were helping me to run the course we’re all on these days. First, the importance of paying attention to your breath (Joan Heminway has written about breath and mindfulness here). Second, if you just keep putting one foot in front of the other, you’ll eventually reach the destination/be done. Third, the need for pacing (likely the point my contracts prof was making). Fourth, you’ve always got one more mile in you than you think you have. Fifth, running with others pushes you to be your best and makes the miles fly by. While this is harder to do at the moment, I know that staying connected (via zoom, Skype, Strava etc.) to encouraging, positive people is especially important in these challenging times.
While Haskell went to the 2020 Olympic men’s marathon trials (here), I only read about them in his post and in Runners World. I first learned about the surprise, unsponsored, second-place finisher, Jake Riley, from the article Jake Riley and His Coach Were ‘Broken.’ Now, They’re Going to the Olympics (here). Amazingly, over the past three years, Riley has apparently dealt with a serious bacterial infection, major Achilles surgery, and a divorce. The article ends by quoting his coach as saying “‘There’s nothing better than seeing a broken man come back,’ Troop said. ‘And when they come back, they’ve got nothing to lose.’” Of course, Riley will now have to wait an additional year for his Olympic run. His story of grit, perseverance, and hope really inspired me. As another week in these unusual times begins, I hope that it might offer inspiration to some of you too.
[Revision: actually, I think my last running post is here, but Haskell has still written two since I wrote it!]
Sunday, March 29, 2020
In a December 2018 post (here), I noted that “although esoteric, such issues as who has access to an account at the Fed are critical social policy choices with real world implications that merit broad-based public debate.”
This past week, a federal district court judge granted the Federal Reserve Bank of New York’s (FRBNY) motion to dismiss The Narrow Bank’s (TNB) complaint in TNB USA Inc. v. Federal Reserve Bank of New York (USDC SDNY) (here). In light of this recent opinion, I wanted to reiterate my invitation to BLPB readers to think about seemingly technical, arcane issues such as who gets an account at the Fed – a master account is essentially a bank account at a regional Federal Reserve Bank enabling access to the Federal Reserve Payments System – and how such decisions should be made. The importance of this critical policy issue is only set to increase. A few months ago, the Federal Reserve announced plans to develop FedNow Service (here).
TNB is a financial institution with an innovative business model. Professor Peter-Conti Brown has written about it (here). It’s model is essentially this: open an account at the Federal Reserve, deposit customer funds (financial institution customers), receive interest on the funds deposited at the Fed’s Interest on Excess Reserves Rate (“IOER rate”), keep a slice of the gains, and pay out the remainder to customers. The Federal Reserve is a risk-free counterparty, but it is not limited to paying the risk-free interest rate. So, TNB has a really clever business model. TNB’s Chairman & CEO, James McAndrews spent 28 years working in the Federal Reserve System (19 at the FRBNY). Its Board members also includes two highly respected finance professors: Gary Gorton at Yale University and Darrell Duffie at Stanford University.
TNB received a “temporary Certificate of Authority” from the Connecticut Department of Banking, contingent on several things, including “that the FRBNY would open a master account for TNB.” As the opinion explains, the FRBNY has not actually denied TNB’s application for a master account…though at least 18 months have passed since TNB applied for it! However, as the opinion notes, “the FRBNY’s delay is not TNB’s cause of action.” Hence, United States District Judge Andrew L. Carter, Jr. granted the FRBNY’s motion to dismiss, writing that “TNB lacks standing to pursue its claim, which is also constitutionally and prudentially unripe.”
The decision strikes me as technically correct, and it will be interesting to see TNB’s strategy from here. I’m not taking a position on whether TNB should/should not have a master account without additional research and thought. However, what I am taking a position on is the importance of greater public debate about the underlying policy questions surrounding who does/doesn’t get an account at the Fed.
In Regulating the Invisible: The Case of Over-the-Counter Derivatives (here), I noted that ICE US Trust LLC, an uninsured NY trust company clearing credit default swaps – controversial financial instruments that had just played a huge role in the financial crisis of 2007-08 – had been granted membership in the Federal Reserve System in 2009 (here). ICE Trust was essentially the predecessor of ICE Clear Credit, which essentially has the monopoly on CDS clearing today. Dodd-Frank’s Title VIII explicitly provides the Federal Reserve with the ability to provide accounts and services to clearinghouses designated as systemically important under that title. But prior to Dodd-Frank, I think that granting ICE Trust membership in the Federal Reserve System was a questionable decision.
The Fed obviously has its hands full at the moment with much more urgent issues. In the future, however, it should provide additional clarity about the granting of master accounts and the general timing of such decisions.
Sunday, March 22, 2020
In today’s post, I wanted to call BLPB readers’ attention to two blog posts related to current events that I've found helpful.
First, a few weeks ago, I was really excited to learn that Psychology Today had asked my OU management colleague Dr. Mark Bolino, the Michael F. Price Chair in International Business, to start blogging for them. He recently posted, Managing Employee Stress and Anxiety During the Coronavirus: Some practical, evidence-based advice for managers (here). Although the post’s target audience is likely business managers, I think its wisdom is applicable to a wide variety of work environments.
Second, University of Chicago Booth’s Initiative on Global Markets (IGM) has a Forum (here) on COVID-19 that’s definitely worth checking out. IGM Directors have also posted “Economic Policy Principles for Combating the Covid-19 Crisis” (here). A summary paragraph from this insightful document is below. Thanks to Professor Kathryn Judge for bringing the site to my attention!
We organize our discussion around three pillars. First, following the advice of medical experts, we must do all we can to spread out the number of infections over time, or “flatten the curve.” Second, policies should facilitate production and decision-making in a temporarily socially distanced world. Third, we should prepare to make the post-virus recovery as rapid as possible. Even though these three aspects of the policy response will play out in sequence, policymakers should start acting on all three now.
Sunday, March 15, 2020
To help support the economy as the nation grapples with the coronavirus, the Federal Reserve announced today its decision to take a number of actions (here), including lowering the fed funds target rate to 0 to 1/4%, increasing its holdings of Treasury securities and agency mortgage-backed securities, and taking coordinated measures with foreign central banks (I've written about the Fed's use of central bank swap lines, here). Today’s announcement is the Fed's second interest rate cut in two weeks. On March 3, 2020, it lowered the fed funds target rate to 1 to 1.25%. Economist Carola Binder recently posted (here) an interesting paper, Coronavirus Fears and Macroeconomic Expectations, related to this first March 2020 interest rate cut. Here’s the abstract:
The Federal Reserve cut interest rates by 50 basis points on March 3, 2020, in response to concerns about the coronavirus (COVID-19). On March 5 and 6, I conducted an online survey of over 500 U.S. consumers that asked about their attention to, concerns about, and responses to the coronavirus, their awareness of the Fed's policy move, and their inflation and unemployment expectations. I then provided respondents with information about the Fed's policy announcement, and re-elicited inflation and unemployment expectations. Most consumers were somewhat or very concerned about effects of coronavirus on the U.S. economy, their health, and their personal finances; 28% had cancelled or postponed travel and 40% purchased food or supplies in response to these concerns. About 38% were aware that the Fed had cut interest rates. I show how concerns and awareness of the rate cut depend on consumer characteristics and news sources. Greater concern about coronavirus is associated with higher inflation expectations and more pessimistic unemployment expectations. Provision of information about the Fed announcement leads some consumers to become more optimistic about unemployment and revise inflation expectations downward, consistent with recent research showing that many consumers associate bad times with high inflation.
Sunday, March 1, 2020
Professor Saule T. Omarova at Cornell Law School recently posted (here) a new article to SSRN, Technology v. Technocracy: Fintech as a Regulatory Challenge (forthcoming, Journal of Financial Regulation). I'm excited to read it. Omarova's articles are always excellent and it's on an important, timely topic. Here's the abstract:
Technology is a tool. How to use it, for what purposes and to what effects, is a choice. What does this choice involve in the context of fintech? And how can it be translated into a coherent strategy of fintech regulation? These questions are at the heart of this article. Taking a broad view of fintech as a systemic force disrupting the very enterprise of financial regulation, as opposed to any particular regulatory scheme, the article offers a conceptual framework for the development of a more cohesive and effective public policy response to fintech disruption.
The article argues that the currently dominant technocratic model of financial regulation is inherently limited in its ability to respond to systemic challenges posed by fintech. The existing regulatory model operates primarily through the mechanisms of structural compartmentalization, bureaucratic specialization, and narrow targeting of isolated and well-controlled micro-level phenomena. Fintech, however, is transforming financial markets in ways that directly undermine the basic premises underlying this technocratic paradigm. Exploring these dynamics, the article develops a five-part taxonomy of the key tech-driven changes in the structure and operation of the financial system, and the corresponding challenges these systemic shifts pose to the continuing efficacy of the regulatory enterprise.
This exercise reveals the fundamental tension at the core of the fintech problem. In the fintech era, the financial system is growing ever bigger, moving ever faster, and getting ever more complex and difficult to manage. The emerging regulatory responses to these macro-level changes, however, continue to operate primarily on the micro-level. The article surveys current efforts to regulate fintech—including regulatory “sandboxes,” special charters, and RegTech—and highlights the limiting effects of the technocratic bias built into their design. Against that background, it outlines several alternative reform options that would explicitly target the core macro-structural, as opposed to micro-transactional, aspects of the fintech challenge—and do so in a more assertive, comprehensive, and normatively unified manner.
Sunday, February 23, 2020
At the University of Michigan's Center on Finance, Law & Policy, an important project is underway on The Central Bank of the Future. It’s a great, timely topic. The project’s website explains that: “In partnership with the Bill and Melinda Gates Foundation, this project explores the mandate and design of central banks to consider whether they might play an even stronger role in promoting financial inclusion, financial health, and a more inclusive economy. More broadly, it creates a vision for what the "central bank of the future" might look like and focuses in particular on how emerging technology could support central banks in their efforts to promote financial inclusion, growth, and development.”
The March 20, 2020, deadline is fast approaching to submit academic papers, policy proposals, and pitches for technology products or services to the Central Bank of the Future Conference (w/ co-host Federal Reserve Bank of San Francisco), November 16-17, 2020. A link to all of the details of the call for papers is here.
Sunday, February 16, 2020
What’s the #1 new release in Banking Law on Amazon? I’m glad you asked! It’s Professor David Zaring’s first book, The Globalized Governance of Finance (Cambridge University Press). In 2008, Zaring joined Wharton's Legal Studies and Business Ethics Department as an assistant professor. At the time, I was a PhD student in the Department and also focused on banking law. So, it was really exciting for me to have a banking law scholar join us and I’m thrilled to now have a chance to highlight his new book. My copy is on its way from Amazon, so for now, I’ll share Zaring’s description of his book and my own thoughts with BLPB readers soon!
The book pulls together work I’ve done on the regulatory networks – the Basel Committee, IOSCO, IAIS, e.g., – that have become the global taste for harmonizing financial regulation. I think the regimes, and their relative bindingness (especially Basel), are interesting in their own right, and they are also an interesting way of doing global governance, where the sine qua non is often thought to be a treaty enforced by a tribunal, a la the World Trade Organization.
But in finance, you see neither of those things, and still robust oversight that American regulators, regardless of administration, seem to embrace. Even as the Trump administration has pushed for changes in trade law, Randal Quarles of the Fed has been installed as chair of the Financial Stability Board, the network of networks that keeps everything moving. The Obama administration tried to get a Basel-like process into its trade deals, and issued an executive order encouraging agencies to harmonize regulations.
Moreover, since the financial crisis, regulators have doubled down on these networks, adding political oversight from the G-20, a middle manager in the FSB, and standardizing notice and comment rulemaking at the network level. That, I think, makes the whole scheme look increasingly like a cross-border bureaucracy. After all, American agencies make policy through notice and comment rulemaking overseen by career regulators overseen by political leaders. So too Basel, IOSCO, IAIS, and the other networks.