Posts Tagged ‘Financial reform’

A Strict Liability Regime for Rating Agencies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 25, 2014 at 9:02 am
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Editor’s Note: The following paper comes to us from Alessio Pacces and Alessandro Romano, both of the Erasmus School of Law at Erasmus University Rotterdam.

In our recent ECGI working paper, A Strict Liability Regime for Rating Agencies, we study how to induce Credit Rating Agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows.

Referring to CRAs, Paul Krugman wrote that: “It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt […] could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.”

However, the conflicts of interest stemming from the issuer-pays model and rating shopping by issuers are not sufficient to explain rating inflation. Because ratings are valuable only as far as they are considered informative by investors, in a well-functioning market, reputational sanctions should prevent rating inflation.

…continue reading: A Strict Liability Regime for Rating Agencies

Money Market Fund Reform

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday July 25, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today’s [July 23, 2014] reforms will fundamentally change the way that most money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis. Together, this strong reform package will make our financial system more resilient and enhance the transparency and fairness of these products for America’s investors.

…continue reading: Money Market Fund Reform

Embracing Sponsor Support in Money Market Fund Reform

Editor’s Note: Jill E. Fisch is Perry Golkin Professor of Law and Co-Director of the Institute for Law & Economics at the University of Pennsylvania Law School.

Money market funds (MMFs) have, since the 2008 financial crisis, been deemed part of the nefarious shadow banking industry and targeted for regulatory reform. In my paper, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, I critically evaluate the logic behind current reform proposals, demonstrating that none of the proposals is likely to be effective in addressing the primary source of MMF stability—redemption demands in times of economic resources that impose pressure on MMF liquidity. In addition, inherent limitations in the mechanisms for calculating the fair value of MMF assets present a practical limitation on the utility of a floating NAV. I then offer an unprecedented alternative approach—mandatory sponsor support. My proposal would require MMF sponsors to commit to supporting their funds as a condition of offering a fund with a fixed $1 NAV.

…continue reading: Embracing Sponsor Support in Money Market Fund Reform

Dodd-Frank At 4: Where Do We Go From Here?

Editor’s Note: David M. Lynn is a partner and co-chair of the Corporate Finance practice at Morrison & Foerster LLP. The following post is based on a Morrison & Foerster publication; the complete text, including appendix, is available here.

Where do we go from here? As we mark another milestone in regulatory reform with the fourth anniversary of the enactment of the Dodd-Frank Act, it strikes us that although most studies required to be undertaken by the Act have been released and final rules have been promulgated addressing many of the most important regulatory measures, we are still living with a great deal of regulatory uncertainty and extraordinary regulatory complexity.

…continue reading: Dodd-Frank At 4: Where Do We Go From Here?

Statement on the Anniversary of the Dodd-Frank Act

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Monday July 21, 2014 at 9:11 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent Public Statement, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The fourth anniversary of the passage of the Dodd-Frank Act provides an opportunity to reflect on why the Act was passed, how the SEC has used the Act to promote financial stability and protect American investors, and what remains to be completed. The financial crisis was devastating, resulting in untold losses for American households and demonstrating the need for strong and effective regulatory action to prevent any recurrence.

…continue reading: Statement on the Anniversary of the Dodd-Frank Act

Incentives and Ideology

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday June 23, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from James Kwak at University of Connecticut School of Law.

The financial crisis that began in 2007 prompted a tidal wave of thinking about financial regulation. One major theme that has been pursued by the Financial Crisis Inquiry Commission, journalists, and scholars—most recently in Other People’s Houses, by Jennifer Taub—is the question of what went wrong in the years or decades leading up the crisis. A second strand of research answers the question of what substantive regulations we should have; one important book in this genre is The Banker’s New Clothes, by Anat Admati and Martin Hellwig. But beyond the issue of what regulations are appropriate for today’s complex financial system, a third important area of inquiry is the political and administrative landscape in which financial regulations (whether statutes, rules, administrative guidances, or court opinions) are hammered out. After all, if it were somehow possible to design a perfect regulatory framework, it could only become effective by navigating through the complicated web of interests and incentives that encompasses the legislative and executive (and perhaps judicial) branches.

…continue reading: Incentives and Ideology

The Functional Regulation of Finance

Posted by Steven L. Schwarcz, Duke University, on Monday June 16, 2014 at 9:21 am
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Editor’s Note: Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

How should we think about regulating our dynamically changing financial system? Existing regulatory approaches have two temporal flaws. The obvious flaw, driven by politics and human nature, is that financial regulation is overly reactive to past crises. The Dodd-Frank Act, for example, puts much weight on reforming mortgage financing.

There is, however, a less obvious flaw: that financial regulation is normally tethered to the financial architecture, including the distinctive design and structure of financial firms and markets, in place when the regulation is promulgated. This type of grounded regulation can have value as long as it is monitored and updated as needed to adapt to changes in the financial architecture. Yet without that monitoring and updating, it can quickly become outmoded—such as occurred in 2008 when the pre-crisis financial regulatory framework, based on the dominance of bank-intermediated funding, failed to address a collapsing financial system in which the majority of funding had become non-bank intermediated.

…continue reading: The Functional Regulation of Finance

Practical Guidance on Macroprudential Finance-Regulatory Reform

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 22, 2013 at 9:20 am
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Editor’s Note: The following post comes to us from Robert Hockett, Professor of Financial and International Economic Law at Cornell Law School.

The global financial troubles of 2008-09, with whose debt-deflationary macroeconomic consequences [1] the world continues to struggle, [2] exposed weaknesses in many financial sector oversight regimes. Most of these had in common their focus on the safety and soundness of individual financial institutions to the exclusion of the stability of financial systems as wholes—wholes whose structural features render them more than mere sums of their institutional parts.

A number of academic, governmental, and other finance-regulatory authorities, myself included, [3] have accordingly concluded that an appropriately inclusive finance-regulatory oversight regime must concern itself as much with the identification and mitigation of systemic risk as with that of institutional risk. Once primarily ‘microprudential’ finance-regulatory oversight and policy instruments, in other words, are now understood to be in need of supplementation with ‘macroprudential’ finance-regulatory oversight and policy instruments.

Now because finance-regulatory policy in most jurisdictions is implemented through law, all of the weaknesses inherent in exclusively microprudential finance-regulatory regimes are, among other things, legal problems. They are weaknesses in what some non-American lawyers call existing ‘legal frameworks.’ Many countries in consequence are now looking to update their legal frameworks for finance-regulatory oversight, supplementing their traditional microprudential foci and methods with macroprudential counterparts.

…continue reading: Practical Guidance on Macroprudential Finance-Regulatory Reform

A Simpler Approach to Financial Reform

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 17, 2013 at 9:20 am
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Editor’s Note: The following post comes to us from Morgan Ricks at Vanderbilt Law School.

There is a growing consensus that new financial reform legislation may be in order. The Dodd-Frank Act of 2010, while well-intended, is now widely viewed to be at best insufficient, at worst a costly misfire. Members of Congress are considering new and different measures. Some have proposed substantially higher capital requirements for the largest financial firms; others favor an updated version of the old Glass-Steagall regime.

In A Simpler Approach to Financial Reform, forthcoming in Regulation, I suggest a different and simpler strategy. This simpler approach would be compatible with other financial stability reforms. However, in the first instance, it is better understood as a substitute for Dodd-Frank and other measures. The simpler approach would require new legislation. It consists of the following specific measures, starting from a pre-Dodd-Frank baseline:

…continue reading: A Simpler Approach to Financial Reform

“Cowboy Company”

Posted by Bart Chilton, Commissioner, U.S. Commodity Futures Trading Commission, on Monday August 19, 2013 at 9:35 am
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Editor’s Note: Bart Chilton is a Commissioner at the U.S. Commodity Futures Trading Commission. This post is based on Commissioner Chilton’s remarks to the Amcot 2013 Business Conference in Lake Tahoe, California, available here.

When people think of Tahoe, they may ponder “Tahoe, oh—skiing, the Lake, maybe golf or gambling. Heck, let’s go.” But today, well, let’s switch it up and talk about the Old West and Tahoe aglow, back in the day. This is a fitting place to do just that. The Ponderosa Ranch, from Bonanza, was just over yonder, on the Nevada side of the Lake. Remember the Cartwright’s? There was Ben who survived three wives, but begets a son from each one: Adam, Hoss, and Little Joe. And just a few miles from here, they hold the Genoa Cowboy Festival at the site of the first ranch in Nevada. (Not the Mustang Ranch—that’s 15 minutes east of Reno. Hey, you at the door, where ya going?) The first ranch in Nevada was Trimmer Ranch No. 1. Let’s assume there were others. The oldest saloon in Nevada is also in Genoa. A portion of the original bar from the 1800’s is still in use. And, the local phone book lists at least 25 places to “get your boots on” and get a pair.

Right about now, some of you might be thinking, “Whoa, hold your horses there, long hair.” Isn’t this supposed to be about financial regulation or commodity markets or something?” Yeah, Sundance, it is. We’re just going to kick up the dust a bit as we “tumble along with the tumbling tumbleweeds” and have our cordial conversationalizing. After all, like George Strait sings, “I ain’t here for a long time. I’m here for a good time.” So, let’s get to it and talk some about the Old West and our financial markets today.

…continue reading: “Cowboy Company”

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