Showing 9 of 196 Publications in Financial Regulation

Capital Confusion at the New York Times

TOTM In a recent guest essay for The New York Times, Aaron Klein of the Brookings Institution claims that the merger between Capital One and Discover would “keep intact the . . .

In a recent guest essay for The New York Times, Aaron Klein of the Brookings Institution claims that the merger between Capital One and Discover would “keep intact the broken and predatory system in which credit card companies profit handsomely by rewarding our richest Americans and advantaging the biggest corporations.”

That’s quite an indictment! Fortunately, Klein also offers solutions. Phew!

Read the full piece here.

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Financial Regulation & Corporate Governance

Regulating Producers by Randomizing Consumers

Scholarship Abstract Consumer law aims to empower consumers with accurate information and to protect them from misinformation. For complex goods and services, however, mandated disclosure laws . . .

Abstract

Consumer law aims to empower consumers with accurate information and to protect them from misinformation. For complex goods and services, however, mandated disclosure laws and other consumer law tools have had only limited success in helping consumers project their satisfaction and costs. Market responses, such as ratings, have limitations that have prevented them from compensating adequately for consumer law’s shortcomings. This Article describes how regulators could improve measurements of quality and cost by borrowing a tool from drug law: randomization. In designated markets, consumers who accept an incentive to volunteer would be randomized among two or more choices, and the government would collect short- and long-term information about each consumer’s experience. For example, in the health insurance market, by providing discounts to consumers who select two or more possible insurers, the government could accomplish the goal of comparing insurers’ health outcomes, free from the current confounding concern that different health insurers serve different pools of insureds. Randomization similarly could help overcome informational problems and abusive conduct in highly regulated markets for health providers, educational institutions, and lawyers, as well as for more ordinary goods and services, such as automobile repair. The information generated through randomization not only could be of direct use to consumers, but also could serve as an input into additional regulation, allowing the government to make more informed decisions about mandating product features where data establishes that producers exploit systematic errors by consumers.

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Financial Regulation & Corporate Governance

Looking Forward by Looking Backward: The Future of Consumer Finance and Financial Protection

Scholarship Abstract This essay was prepared for “The Future of Financial Regulation Symposium” October 6, 2023, sponsored by the C. Boyden Gray Center. I assess the . . .

Abstract

This essay was prepared for “The Future of Financial Regulation Symposium” October 6, 2023, sponsored by the C. Boyden Gray Center. I assess the future of consumer finance and financial protection by looking to the lessons of history. Consumer finance and financial protection in the United States exhibits a spontaneous evolution driven by changes in technology and consumer preferences in a repeated cycle. In general, consumers use consumer finance in a manner consistent with the predictions of rational behavior in order to improve their lives. Consistently, this goal of consumer betterment runs up against paternalistic and repressive laws, which attempt to prevent the beneficial evolution of technology and competition. Eventually economic forces overwhelm regulatory repression for the betterment of consumers.

I track three distinct eras in the evolution of consumer finance and financial regulation that provide a roadmap to the future evolution in the virtual era and emergent threats to consumers from private and public sources, including the growing use of the consumer finance system to infringe on the exercise of constitutionally-protected values.

Read at SSRN.

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Financial Regulation & Corporate Governance

Artificial Intelligence and IFCs

Popular Media Artificial intelligence (AI) is transforming the financial services industry. For tax neutral IFCs such as Cayman, Bermuda, and Jersey, it has the potential to increase . . .

Artificial intelligence (AI) is transforming the financial services industry. For tax neutral IFCs such as Cayman, Bermuda, and Jersey, it has the potential to increase competitiveness and facilitate economic diversification. The benefits could be enormous, but to realise this potential, jurisdictions will have to be open to the new technology. Two factors underpin such openness. First, enabling businesses to access the skills to ensure that AI can be implemented successfully and appropriately. Second, avoiding excessively prescriptive and precautionary restrictions on the development and use of AI.

Read the full piece here.

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Financial Regulation & Corporate Governance

Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity

Regulatory Comments Re: “Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity”; Docket ID OCC–2023–0008 (OCC); Docket No. R–1813, RIN 7100–AG64 (Board); and . . .

Re: “Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity”; Docket ID OCC–2023–0008 (OCC); Docket No. R–1813, RIN 7100–AG64 (Board); and RIN 3064–AF29 (FDIC)

To Whom It May Concern:

Reducing risk for banks and taxpayers while ensuring capital is accessible and affordable is of paramount importance. The costs of higher capital requirements will be passed down to large swaths of the U.S. economy, such as homebuyers, small businesses, and manufacturers. The Proposal lacks the economic analysis and the data needed to justify the amendments to the bank capital rules. It also circumvents Congress by dismissing the statutory provisions of the Economic Growth, Regulatory Relief, and Consumer  Protection Act (P.L. 115-174). However, regulators have an opportunity to allow banks to participate in insurance and reinsurance-based credit risk transfers to ameliorate the burdensome effects of higher  capital requirements under the Proposal.

Credit risk transfers effectively serve as a private capital buffer to protect taxpayers from underlying credit risks. Under the Proposal banks should be explicitly authorized to use insurance and reinsurance products to offload credit risk and provide relief from heightened capital requirements. The Proposal should allow insurance and reinsurance contracts to be considered as “eligible guarantees” while  insurers and reinsurers should be considered “eligible guarantors.”

The Proposal should not leave standing regulatory barriers that prevent banks from using insurance and  reinsurance as an option. For example, lowering the risk weight for exposures to certain insurance and  reinsurance companies could be an alternative option.[1]

These private-sector products have a proven track record. One paper discusses the potential benefits of  expanding government-sponsored enterprise’s credit risk transfer exposure to reinsurance.[2] The same  benefits could be afforded to the banking sector, if the regulatory framework adequately authorizes it.

Other countries already allow their banks to use insurance and reinsurance credit risk transfers, putting  banks in the U.S. at a competitive disadvantage.

Consumers, taxpayers, and banks do not need another financial crisis that results in another era of  taxpayer-funded bank bailouts. They need tailored regulation that reduces risk and volatility and gives  consumers access to affordable capital—all of which the private sector can bring to bear.

The Proposal should abide by the statutory mandates in P.L. 115-174 by tailoring regulations and ensuring  that banks have the option to use private-sector alternatives to mitigate capital burdens while also enhancing capital allocation to all reaches of the U.S. economy.

Steve Pociask
President/CEO
American Consumer Institute

David Williams
President
Taxpayers Protection Alliance

John Berlau
Director of Finance Policy
Competitive Enterprise Institute

Saulius “Saul” Anuzis
President
60 Plus Association

George Landrith
President
Frontiers for Freedom

Adam Brandon
President
FreedomWorks

Ray Lehmann
Editor In Chief
International Center for Law & Economics (For identification only)

Grover Norquist
President
Americans for Tax Reform

Jerry Theodorou
Director
R Street Institute

Douglas Holtz-Eakin
President
American Action Forum
(For identification only)

James L. Martin
Founder/Chairman
60 Plus Association

Mario H. Lopez
President
Hispanic Leadership Fund

Pete Sepp
President
National Taxpayers Union

Gerard Scimeca
Chairman
Consumer Action for a Strong Economy

[1] 88 FR 64053, 64054.

[2] https://us.milliman.com/en/insight/In-it-for-the-long-haul-A-case-for-the-expanded-use-of-the-GSEs reinsurance-CRT-executions.

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Financial Regulation & Corporate Governance

National Rifle Association of America v. Vullo: Brief to the Supreme Court of Financial and Business Law Scholars as Amici Curiae in Support of Petitioner

Scholarship Abstract The court below erred in finding that the lack of explicit binding language or threats from the New York Department of Financial Services in . . .

Abstract

The court below erred in finding that the lack of explicit binding language or threats from the New York Department of Financial Services in its guidance letters meant that no reasonable regulated firm would consider itself bound by those letters. The reality of banking and insurance regulation is that firms frequently feel that they risk sanction if they do not comply with nominally non-binding guidance.

Further, the use of guidance and reputation risk as tools of regulation has shown itself to enable abuses where regulators sought to enforce their policy preferences, rather than the law, under the guise of protecting the safety and soundness of regulated financial firms.

Finally, the nature and logic of reputation risk regulation, even if applied by a neutral regulator, enables a regulator-enforced “economic hecklers veto” by parties with sufficient economic power over a regulated firm.

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Financial Regulation & Corporate Governance

The Supreme Court ‘Pulled a Brodie’: Swift and Erie in a Commercial Law Perspective

Scholarship Abstract Erie Railroad v. Tompkins is a cornerstone of modern American law. Erie overturned Swift v. Tyson, a case that had stood for nearly a century with minimal objection. Swift involved . . .

Abstract

Erie Railroad v. Tompkins is a cornerstone of modern American law. Erie overturned Swift v. Tyson, a case that had stood for nearly a century with minimal objection. Swift involved the negotiability of commercial paper and the holding of the case, that in disputes heard in federal courts under diversity jurisdiction, the court should use traditional common law methods to resolve the case rather than feeling bound by the authoritative pronouncements of a state court.

Correspondence between Harvard Law School’s Lon Fuller and Yale’s Arthur Corbin—arguably the two greatest Contracts Law professors of the mid-Twentieth Century—reveals widespread ridicule and dismay among commercial lawyers and scholars following Erie. Fuller quotes the great Harvard Constitutional Law scholar as saying the Supreme Court “pulled a brodie” in Erie. This article reviews Erie from the perspective of commercial law, rather than the public law commentary that has dominated discussion of the Erie doctrine since its birth, seeking to understand the depth of contempt for Erie among commercial lawyers in terms of its consequences, reasoning, and jurisprudential approach.

Read at SSRN.

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Financial Regulation & Corporate Governance

Colorado Is Mapping a Dangerous Path on Access to Credit

Popular Media The credit card you used to purchase your latte this morning and to fill your car with gas was probably issued by a bank based . . .

The credit card you used to purchase your latte this morning and to fill your car with gas was probably issued by a bank based in Delaware, South Dakota or some state other than Colorado. Why? Because under a unanimous 1978 decision authored by liberal lion William Brennan, the Supreme Court ruled that banks holding a “national charter” would be governed by the interest rate ceilings of the state in which the bank is based instead of the state of the customer’s residence. This one decision transformed the American economy, unleashing unprecedented competition and putting Visa, Mastercard and other credit cards in the hands of millions of American families who were previously reliant on pawnbrokers, personal finance companies and store credit to make ends meet.

Yet a law set to go into effect in Colorado in July would deprive the most credit-deprived Coloradans of the same access to competitive financial services available to the more well-off and effectively destroy the rapidly growing fintech industry in the state. The consequences to Colorado’s more financially strapped households could be catastrophic. Other states are considering following suit.

Read the full piece here.

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Financial Regulation & Corporate Governance

As Good as Gold? A Framework for Analyzing Redeemable Paper Money

Scholarship Abstract In this paper we present a theory of note discounts, exchange rates between brands of notes, and the price level in convertible paper money . . .

Abstract

In this paper we present a theory of note discounts, exchange rates between brands of notes, and the price level in convertible paper money regimes. We show that under perfect commitment to convertibility, notes and the underlying commodity are perfect substitutes and price level determination is identical to a pure commodity standard. Different brands of currency trade at par. With imperfect commitment to convertibility, the probability that the issuer reneges on the commitment to convertibility explains discounts/premia on notes and exchange rates between brands in competitive note regimes. In non-competitive regimes, the probability of reneging explains fluctuations in the price level. To support our model, we discuss historical events and time periods that are consistent with our theory.

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Financial Regulation & Corporate Governance