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!
Sunday, September 13, 2020
Sept 15 Deadline - Call for Submissions: AALS Section on Financial Institutions and Consumer Financial Protection
Dear BLPB readers:
The AALS Section on Financial Institutions and Consumer Financial Protection invites submissions of no more than five pages for the 2021 annual meeting. Selected speakers would present on Tuesday, January 5, from 1:15 to 2:30 pm ET. The submission can be the abstract and/or introduction from a longer paper, and it should relate to the following session description:
After the 2008 financial crisis, Congress overhauled financial regulation. The Dodd-Frank Act of 2010 created a new consumer protection agency, limited bank investment, imposed new capital and liquidity requirements, created an umbrella financial council, and reworked derivatives oversight, among many significant pieces. This session will explore ideas about what the next sweeping financial legislation should entail.
Please send your anonymized materials by September 15, 2020, to Joseph Graham, email@example.com. Please also indicate (a) whether you are tenured, pre-tenure, or other; (b) how far along the full article is, and (c) optionally, any other information that might benefit the committee in selecting a diverse panel of speakers.
On behalf of the Section on Financial Institutions and Consumer Financial Protection
Chair: Rory Van Loo (Boston University)
Chair-Elect: Pat McCoy (Boston College)
Executive Committee Members:
Hilary Allen (American University)
Felix Chang (University of Cincinnati)
Gina-Gail Fletcher (Duke University)
Kathryn Judge (Columbia University)
Michael Malloy (University of the Pacific)
Christopher Odinet (University of Iowa)
Paolo Saguato (George Mason University)
Jennifer Taub (Western New England University)
Andrew Tuch (Washington University)
David Zaring (University of Pennsylvania)
Wednesday, September 9, 2020
Just today, Professor Christopher Odinet posted Predatory Fintech and the Politics of Banking (forthcoming, Iowa Law Review) to SSRN (here). It's already been downloaded over 100 times, and I can't wait to read it! Here's the Abstract:
With American families living on the financial edge and seeking out high cost loans even before COVID-19, the term financial technology or “fintech” has been used like an incantation aimed at remedying everything that’s wrong with America’s financial system. Scholars and supporters from both the public and private sector proclaim that innovations in financial technology will “bank the unbanked” and open new channels to affordable credit. This exuberance for all things tech in finance has led to a quiet yet aggressive deregulatory agenda, including, as of late, a federal assault via rulemaking on the ability of states to police the cost and privilege of extending credit within their borders. This deregulation and the ethos behind it have made space for growth in high cost, predatory lending that reaches across state lines via websites and smart phones and that is aggressively targeting cash-strapped families. These loans are made using a business model whereby funds are funneled through a group of lightly regulated banks in a way designed to take advantage of federal preemption. Fintech companies rent out and profit from the special legal status of these bank partners, which in turn keeps the bank’s involvement in the shadows. Stripping down fintech’s predatory practices and showing them for what they really are, this Article situates fintech in the context of this country’s longstanding dual banking wars, both between states and the federal government and between consumer advocates and banking regulators. And it points the way forward for scholars and regulators willing to shake off fintech’s hypnotic effect. This means, in the short term, using existing regulatory tools to curtail the dangerous lending identified here, including by taking a more expansive view of what it means for a bank to operate safely and soundly under the law. In the long term, it means having a more comprehensive and national discussion about how we regulate household credit in the digital age, specifically through the convening of a Twenty-First Century Commission on Consumer Finance. The Article explains how and why the time is ripe to do both. As the current pandemic wipes out wages and decimates savings, leaving desperate families turning to predatory fintech finance ever more, the need for reform has never been greater.
Thursday, September 3, 2020
Dear BLPB readers:
AALS Section on Real Estate Transactions and Section on Academic Support
The Changing Architecture of Legal Education:
Real Estate Transactions as a Case Study
What real property law courses should law schools be teaching?
Who should be teaching these courses?
How should the courses be taught?
The Section on Real Estate Transactions and the Section on Academic Support seek to explore these questions and related issues at their joint online session during the 2021 AALS Annual Meeting, The Changing Architecture of Approaches to Legal Education: Real Estate Transactions as a Case Study.
Members of the legal academic community are invited to submit statements of interest in joining the panel of presenters who will discuss the following in the context of real property law and related courses (mortgage finance, securitization, commercial leasing, housing law, real estate development, etc.):
- Law schools’ curricular choices
- Course content and design
- Teaching and pedagogy application.
As explained more in the “Background” section below, the Sections are specifically looking to highlight issues related to course offerings, curricular design, and teaching methodologies that can better prepare students for modern practice and ensure student achievement of course objectives. Statements of interest (including a description/summary of your proposed presentation) should be emailed to Andrea Boyack at firstname.lastname@example.org by September 17, 2020.
There is no formal paper requirement associated with participation on the panel.
The full call for presenters is here: Download AALS Section on Real Estate Transactions and Section on Academic Support Call for Presenters
Wednesday, September 2, 2020
Dear BLPB readers:
CALL FOR PAPERS IN
LEGAL STRATEGY, ETHICS, LEADERSHIP, AND COMPLIANCE FOR ORGANIZATIONS
The Tobias Leadership Center at Indiana University, the Center for Legal Studies & Business Ethics in the Spears School of Business at Oklahoma State University, and the American Business Law Journal to Cohost 2021 Symposium:
Ethical Leadership and Legal Strategies for Post-2020 Organizations
The Tobias Leadership Center at Indiana University, the Center for Legal Studies & Business Ethics at the Spears School of Business, and the American Business Law Journal (ABLJ) welcome submissions on legal strategy, ethics, leadership, and compliance issues that may advance positive organizational change following the multiple challenges of 2020: Public health issues, an economic recession, civil rights and social justice movements, changing working conditions, environmental concerns, innovation, and evolving legal norms. This theme is consistent with 2020 AACSB Standard 9. The ABLJ anticipates publishing a special issue devoted to the symposium theme.
The challenges facing organizations around the globe following the convergence of monumental events in 2020 require a renewed focus on ethical leadership and legal strategies that build structures and organizations to make a positive societal impact. Often times, the law is lagging in its ability to address new means of interacting and conducting business. Given the severity and reach of challenges in 2020, it is imperative to advance the legal and ethical research to meet the moment. This symposium hopes to generate a broad range of scholarship that develops options and opportunities for organizations to contribute positively to their communities and the world following the disruptions of 2020. Only submissions on the symposium theme will be considered for presentation. Interdisciplinary submissions are especially welcome.
The complete call for papers is here: Download Call for papers
Tuesday, September 1, 2020
I’m delighted to share that former UVA law school classmate and friend, Professor John Anderson, is joining us as a guest blogger at the Business Law Prof Blog on Tuesdays over the next month.
Professor Anderson teaches Business Associations, Contracts, White Collar Criminal Law, Securities Law, Human Rights, and Law and Philosophy. His recent scholarship focuses on securities enforcement, white collar crime, and intersections of law and philosophy (e.g., business ethics, constitutionalism, problems of pluralism, and human rights). Professor Anderson has been published in leading peer-reviewed journals and top law journals. He recently published a book with Cambridge University Press, Insider Trading: Law, Ethics, and Reform (2018). Professor Anderson has received numerous teaching awards, and he was named the Mississippi College Distinguished Professor of the Year for 2018-2019.
We’re looking forward to Professor Anderson’s posts, and hope that BLPB readers enjoy them too!
Wednesday, August 26, 2020
Professor Kevin Fandl, the President of the ALSB International Section, has posted a really timely article to SSRN: Trump, Xi and the Threat to the World Trade Organization (here). I’m looking forward to giving it a thorough review just as soon as the new semester settles in! Here’s the abstract:
Is the WTO big enough for two economic superpowers? China’s explosion onto the world economic stage has allowed new and unexpected challenges to emerge, most significantly, which path globalization should be guided down. For 70 years, the western world has approached globalization from a liberalist perspective, seeing it as a corollary to democracy and rules-based economic growth. Yet China, which benefited enormously from globalization, has exceled in the absence of democracy, challenging the idea that the liberal world order is necessary or even desirable.
With the WTO teetering on irrelevance, this is a moment to lift the hood and examine the engine of economic growth we have relied upon for decades. Though both China and the United States have the economic power to unilaterally pursue trade advantages (think NAFTA or the Belt and Road Initiative), it is not in the interest of either party to abandon the constraints imposed by the rules-based WTO system. The WTO provides an avenue to resolve disputes peacefully without the need for unilateral actions, which tend to escalate rather than resolve trade disputes. The WTO also enshrines the ideals of liberal trade by denouncing trade barriers of all kinds and pursuing open exchange. And the WTO establishes, by consensus, the rules of the road that allow countries large and small to compete in a mostly fair and equitable environment. These are public international rules that neither China nor the United States could establish and enforce on their own.
Wednesday, August 19, 2020
As I shared last week (here), many of us who study banking law and regulation are watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, that is in the Second Circuit Court of Appeals. We've been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief written by Professor David Zaring at the Wharton School. Download Zaring_Brief
Zaring has previously written about OCC chartering practices (here). He argues that “the OCC has the authority to issue special purpose national bank charters for financial technology (fintech) companies pursuant to the National Bank Act and 12 C.F.R. §5.20(e)(1).” Hence, the District Court’s judgement should be reversed.
First, as Zaring notes, the core issue here really is: “what is banking?” He argues that the “the business of banking” is “susceptible to more than one meaning,” and that receipt of deposits is not an essential aspect of what it is to be a bank. The plain text of 12 C.F.R. §5.20(e)(1) “allow[s] national banks to obtain an SPNB [special purpose national bank] charter so long as they conduct at least one of three enumerated functions-(1) receive deposits, (2) pay checks, or (3) lend money.” Second, the OCC has a history of taking a cautious, “reasoned approach to charters,” and it “is not trying to hide an elephant in a mousehole or expand the definition of the ‘business of banking’ out of all recognition…” Indeed, Zaring asserts, “the agency’s past practice with special charters illustrates its caution.” Third, it’s costly and unwise to require online fintech firms “to tailor their businesses by state borders,” because of the U.S.’s dual banking system. “Few industries benefit more from regulation at the national level than industries that exist on the internet.” Fourth, the lack of a federal fintech charter is costly to the U.S. in terms of “investment in financial technology,” and international competitiveness in this arena. Finally, the OCC’s “chartering decisions are reviewable,” and, “if appropriate,” the “Court should clarify” this.
Zaring does an excellent job of explaining why the OCC has the authority to grant federal fintech charters to nondepository institutions, and I encourage BLPB readers to review his brief. As I previously noted, the answer to what might seem to be a technical banking law question of interest to few (and perhaps uninteresting to most) will have tremendous practical ramifications.
Stay tuned for Part III! I’ll plan to update BLPB readers when the Second Circuit Court of Appeals issues its decision.
Monday, August 17, 2020
Attention BLPB readers:
The Ohio State Business Law Journal (OSBLJ) is a student-run and student-edited journal that provides a forum for quality, cutting edge articles related to business and corporate law. We publish bi-annually: one edition on scholarly articles and the other edition on student note written by our journal members. We are currently accepting submissions from legal scholars for our scholarly edition, which will deal with the question of whether the business legal structure hamper coping with crises.
We believe that in addition to the relevancy of this topic to the current times, this edition will tie in nicely with the theme of our upcoming symposium in March 2021, “Confronting Crises: Preparing for the Unexpected.” In this symposium, we will have various panels, including: whether the government should take ownership of failing companies; contracting for the worst case scenario; effects of government response to crises; and tax law—the impact of government intervention and the effects it will have on businesses.
We are currently accepting submissions via Scholastica, as well as submissions via email. Any questions, as well as submissions, may be emailed to Mayu Nakano at email@example.com. We look forward to hearing from you!
Thursday, August 13, 2020
Those of us who study banking law and regulation know it’s an absolutely exciting area! That’s particularly true at the moment. Not only are we watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, currently in the Second Circuit Court of Appeals, but we’ve also been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief led by Lev Menand, Saule Omarova, Morgan Ricks, Joe Sommer, and Art Wilmarth, and signed by thirty-three banking law scholars (here).
The professors begin by stating their interest: “ensuring that banking agencies stay within their statutory mandates and work in the public interest.” They term the OCC’s proposal to charter nondepository fintech firms “a dangerous power grab premised on the novel claim that banking is just another word for lending.” In a nutshell, the scholars argue that “the OCC does not have the power to charter entities that are not in the deposit – that is, money creation – business.” It’s actually illegal – as the brief notes – for “unregulated entities to receive deposits.” “Bank deposits constitute the bulk of our nation’s money supply, and it is for this reason that banks are subject to strict federal oversight…Creating deposit dollars is a delegated sovereign privilege – an extremely sensitive activity that justifies federal chartering, regulation, and supervision.” The OCC’s very name is linked to the nation’s currency system!
As the brief explains, if the OCC were to be able to grant federal fintech charters to nondepository institutions, this would result in a significant expansion of its regulatory authority. It would also impact the governance of the Federal Reserve, and expand access to Fed master accounts and discount window lending. Additionally, as banks are exempt from the coverage of the federal securities laws and investment company laws, it would impact the coverage of these laws, and it would even create “an alternative, OCC-controlled system of business organization available to a huge range of companies.”
Indeed, the answer to what might seem to be a technical banking law question of interest to few (and perhaps boring to most) will have tremendous ramifications. The professors do an excellent job of explaining the implications of the OCC having the authority to grant federal fintech charters, and I encourage BLPB readers to review their brief.
Stay tuned for Part II, next Wednesday!! I’ll be highlighting Professor David Zaring’s Amicus Curiae Brief supporting the OCC’s position.
Wednesday, August 5, 2020
The Academy of Legal Studies in Business is in the midst of its annual conference. And, not surprisingly, it’s completely online. Although we aren’t able to meet in person this year, the event has been a really great, remarkably smooth experience. Pre-pandemic, the Program Chair, Professor Robert Bird, at the University of Connecticut School of Business, presciently selected the theme of “Managing Disruption.”
For me, one highlight of the conference thus far has been the opportunity to hear guest speaker Lee Buchheit’s remarks to the ALSB’s International Section on the “State of the Art of Sovereign Debt Restructuring.” Buchheit is arguably the world’s leading expert on sovereign debt restructuring. As an FT Alphaville piece put it: Buchheit “has represented nearly every country that has gone bankrupt since the 1980s, sparring with aggrieved creditors and cajoling stricken governments back to fiscal health — and in the process almost single-handedly building up an entire field of international law.” He didn’t disappoint, giving us a fascinating overview of the major disruption the pandemic is causing in the sovereign debt arena, and the likely challenges that lie ahead, including the risk of a systemic sovereign debt crisis such as happened in the 1980s. For readers interested in learning more about Buchheit’s perspectives on the impending issues in sovereign debt markets, a few places to start are here and here.
Afterwards, the International Section elected a new officer, Professor Justin Evans, to serve the Section, along with Professor Kevin Fandl (President) and myself (Vice-President). A total, but quick, fun digression: Fandl has led several faculty development trips in international business to Chile to study innovation in Chile focused on wine. Watch out for the next iteration!
Our Section meeting was followed by presentations for the ALSB Ralph Bunche Award for Best International Paper. This Award aims to recognize excellent, unpublished research in the area of international business law. There were many exceptional submissions, and it was difficult to select the finalists. Professor Abbey Stemler presented Regulation of Sharing Economy Platforms: A Multi-Country Comparative Study. Professors Brian Feinstein and Kevin Werbach discussed The Impact of Regulation on Global Cryptocurrency Trading (here). Professor Tim Samples, the winner of the Award for 2020, spoke about Investment Disputes and Federal Power in Foreign Relations (here).
Finally, I want to send a big THANK YOU to outgoing President Professor Stephen Park! With his tireless work for, and commitment to, the Section, he did a great job of modeling for future officers excellence in this role.
Friday, July 31, 2020
The School of Business at the University of Connecticut invites applications for a tenure-track or tenured position at the rank of Assistant Professor, Associate Professor, or Professor of Business and Human Rights to begin in Fall 2021.
This faculty position will focus on the intersection of business and human rights broadly understood, including, but not limited to, environmental and social sustainability, corporate social responsibility, social innovation, and social entrepreneurship. The position will reside in the department/discipline of the successful candidate’s research and teaching domains, including Accounting, Finance, Management, Marketing/Business Law, and Operations and Information Management. The successful candidate will collaborate on the development and implementation of research, curricular, and public engagement activities with faculty affiliated with the Human Rights Institute and the Business and Human Rights Initiative at the University of Connecticut. See the following links for more information about the Human Rights Institute (https://humanrights.uconn.edu) and the Business and Human Rights Initiative (https://businessandhumanrights.uconn.edu).
Preference will be given to applications received by September 18, 2020. For a full description of the position and to apply online, go to: https://academicjobsonline.org/ajo/jobs/16575.
Wednesday, July 29, 2020
So, I knew about TEDx and TED Talks, but I just learned about TED-Ed today in viewing Professors George Siedel & Christine Ladwig’s “Ethical Dilemma: The Burger Murders” (here). If you’re planning to incorporate an ethics module into your business law courses this year, including their video and accompanying teaching materials could be a great, entertaining addition to your class that I think students would love. Along with their fun, short video, Siedel and Ladwig have provided teaching materials (here) that include multiple choice and open ended questions; a “dig deeper” piece; and, a guided discussion section. They posted only yesterday, and have already had 152,224 views and 744 comments! Check it out! And if you didn’t see my prior post on Siedel’s negotiation materials, check that out too (here)!
Wednesday, July 22, 2020
An abstract for Ethics of Legal Astuteness: Barring Class Actions Through Arbitration Clauses, written with Daniel T. Ostas and published in the Southern California Interdisciplinary Law Journal is below, and the article is here.
Recent Supreme Court cases empower firms to effectively bar class
action lawsuits through mandatory arbitration clauses included in
consumer adhesion and employment contracts. This article reviews
these legal changes and argues for economic self-restraint among
both corporate executives and corporate lawyers who advise them.
Arbitration has many virtues as it promises to reduce transaction costs
and to streamline economic exchange. Yet, the ethics of implementing
a legal strategy often requires self-restraint when one is in a position
of power, and always requires respect for due process when issues of
human health, safety, and dignity are in play.
An abstract for Banking on the Cloud, written with David Fratto and Lee Reiners, and published in Transactions: The Tennessee Journal of Business Law is below, and the article is here.
Cloud computing is fast becoming a ubiquitous part of today’s
economy for both businesses and individuals. Banks and financial
institutions are no exception. While it has many benefits, cloud
computing also has costs and introduces risks. Significant cloud
providers are single points of failure and, as such, are an important
new source of systemic risk in financial markets. Given this reality,
this article argues that such institutions should be considered critical
infrastructures and designated as systemically important financial
market utilities under Dodd-Frank’s Title VIII
Wednesday, July 15, 2020
In a past post (here), I mentioned stumbling (thankfully!!) into teaching in the area of Negotiation and Dispute Resolution while a PhD student focused on financial regulation. For so many reasons, the opportunity to pursue doctoral studies in the Ethics & Legal Studies Program at the Wharton Business School was truly a great blessing! So, I’m delighted to share with BLPB readers that applications for the Program’s incoming class of 2021 are now being accepted. If you – or someone you know – might be interested in learning more, an quick overview is provided below and an informational flyer here: Download Ethics&LegalStudiesDoctoralProgram
The Ethics & Legal Studies Doctoral Program at Wharton focuses on the study of ethics and law in business. It is designed to prepare graduates for tenure-track careers in university teaching and research at leading business schools, and law schools.
Our curriculum crosses many disciplinary boundaries. Students take a core set of courses in the area of ethics and law in business, along with courses in an additional disciplinary concentration such as law, management, philosophy/ethical theory, finance, marketing, or accounting. Students can take courses in other Penn departments and can pursue joint degrees. Additionally, our program offers flexibility in course offerings and research topics. This reflects the interdisciplinary nature of our Department and the diversity of our doctoral student backgrounds.
Faculty and student intellectual interests include a range of topics such as:
- legal theory • normative political theory • ethical theory • firm theory • law and economics • private law theory • penal theory • constitutional law • bankruptcy • corporate governance • corporate law • financial regulation • administrative law • empirical legal studies • blockchain and law • antitrust law • fraud and deception • environmental law and policy • corporate criminal law • corporate moral agency • corruption • behavioral ethics • negotiations.
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!