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game stop deja vu January 28, 2021

Posted by Bradley in : financial regulation , add a comment

Fascinating to read the coverage of the clash between short sellers and others over GameStop, and the calls for regulators to address the issue of divergence between the performance of stock markets and the real economy.I have my first International Finance class today and (though this story is essentially, at least on the surface) an American story, I am going to spend some time on this story. The idea that market participants want to push, that what they are doing is legitimate trading, and what the redditers are doing is inappropriate gambling/trading for entertainment is not new. About 20 years ago I wrote about similar discussions prompted by the rise of day traders: Disorderly Conduct: Day Traders and the Ideology of “Fair and Orderly Markets,” 26 J. Corp. L 63 (2000).

fintech opacity February 25, 2020

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The Irving Fisher Committee on Central Bank Statistics has published a Report on Central Banks and Fintech Data Issues which identifies a number of issues relating to the implications of increased use of fintech for the availability of data central banks need to address their mandates relating to monetary and financial stability and the operation of payments systems. Some questions relate to financial activity by entities that are not within the regulatory perimeter for reporting to central banks, and other issues relate to data about fintech activities by traditional financial intermediaries, such as what operational, reputational, financial issues are raised by their fintech activities.  In jurisdictions where fintech is most developed central banks are actively seeking to close these data gaps.

politics and financial stability August 23, 2019

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Regulators in the US are relaxing regulatory constraints on financial institutions introduced in response to the financial crisis, although recent episodes of volatility in financial markets and suggestions that recessions are underway or developing raise some questions about whether this makes sense.  It is not clear that the post crisis regulatory changes had a negative effect on SME financing, for example (the Financial Stability Board suggested this in the summer,  and asked for reactions).  And, in addition to purely economic considerations there are political developments which raise questions about risks to financial stability, such as the concerns banks in Hong Kong have raised about protests there.

Jerome Powell today had some words about financial stability:

At the end of the day, we cannot prevent people from finding ways to take excessive financial risks. But we can work to make sure that they bear the costs of their decisions, and that the financial system as a whole continues to function effectively. Since the crisis, Congress, the Fed, and other regulatory authorities here and around the world have taken substantial steps to achieve these goals. Banks and other key institutions have  significantly more capital and more stable funding than before the crisis. …  We have not seen unsustainable borrowing, financial booms, or other excesses of the sort that occurred at times during the Great Moderation, and I continue to judge overall financial stability risks to be moderate. But we remain vigilant.

However, he also pointed out that “fitting trade policy uncertainty” into the Fed’s analysis was “a new challenge.” Recent events are complex:

The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Longterm bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent.

It’s not clear to me that at this point suggesting to financial institutions that they should be taking on more risk makes sense.

fintech developments August 2, 2018

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The OCC has announced that it will begin to accept applications for national banking charters from Fintech companies via a policy statement, and a supplement to the Comptroller’s Licensing Manual. The Department of the Treasury published another in the series of papers on A Financial System That Creates Economic Opportunities, this time on Nonbank Financials, Fintech, and Innovation. The report summarizes its recommendations as falling within four categories:

Adapting regulatory approaches to changes in the aggregation, sharing, and use of consumer financial data, and to support the development of key competitive technologies; Aligning the regulatory framework to combat unnecessary regulatory fragmentation, and account for new business models enabled by financial technologies; Updating activity-specific regulations across a range of products and services offered by nonbank financial institutions, many of which have become outdated in light of technological advances; and Advocating an approach to regulation that enables responsible experimentation in the
financial sector, improves regulatory agility, and advances American interests abroad.

The report identifies regulatory fragmentation as an impediment to responsible innovation in many areas, is largely deregulatory, and endorses the idea of regulatory sandboxes, suggesting Congress enact legislation to provide for these. But the report uses words like appropriate a lot to describe what regulation might look like, and there are recognitions of some risks associated with Fintech (such as cybersecurity and other operational risks). So, a bit cagey about how deregulatory the plan is. I imagine a lot, but it’s written in a way that doesn’t always make that completely clear. However, note that whereas in many cases the report argues for federal rules (supposedly to eliminate complexity) in the case of payday lending the report argues that the CFPB’s payday lending rule should be rescinded in favour of state regulation.

The NYDFS expressed reservations about both initiatives. The NYDFS’ recent Online Lending Report emphasized the need for consumer protection in the online lending context.

The Treasury Report did not address blockchain and distributed ledger technologies in any detail the report notes that FSOC is leading a working group on these issues although there’s not much information publicly available about what the working group is doing. And we know that the SEC has concerns about initial coin offerings.

Towards the end of the report there are some comments about the US needing to be involved in the work of international forums and standard-setters, and to work with regulators in other jurisdictions. But international standards should let domestic regulators establish their own approaches before setting international standards, and they should be careful to adhere to their core mandates.

climate change and financial regulation February 2, 2018

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I have a short piece on this topic in the current Miami Law Magazine.

new draft of paper: climate change and brexit as financial stability risks July 21, 2017

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Here: Climate Change and Brexit as Financial Stability Risks (July 2017 version).

aals: the corporate stake in climate change response January 4, 2017

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I’ll be at the AALS in San Francisco this week, participating in a panel on climate change. I.m going to be talking about climate change as a financial stability issue based on this draft paper.

useful and timely caveat from the comptroller of the currency November 30, 2016

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Thomas Curry, in a speech at The Clearing House Annual Conference:

I am glad that our banks and the banking system are stronger today, but now is not the time to let our guard down. Those who have been in this business for more than one cycle know a downturn will come. Effective regulation and supervision will help ensure that the trough will not be so deep or so wide. Those who forget or choose to ignore the lessons of the last crisis do so at their own peril and increase the risk to all of us.

consequences of financial sector misconduct September 28, 2016

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John Chiang, California State Treasurer, announced sanctions against Wells Fargo for a period of one year from today including the suspension of investments by the Treasurer’s Office in all Wells Fargo securities, suspension of the use of Wells Fargo as a broker-dealer for purchasing of investments by his office and suspension of Wells Fargo as a managing underwriter on negotiated sales of California state bonds where the Treasurer appoints the underwriter. The letter announcing the sanctions to Wells Fargo states:

In the case of Wells Fargo, how can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who have placed their financial well-being in its care? I have a responsibility as a leader in the financial marketplace to take action aimed at helping you understand that integrity and trust matter.

Meanwhile the UK’s Financial Conduct Authority published a raft of consultation and other documents collected together under the rubric “new measures to maintain firms’ focus on culture”, including a Policy Statement on regulatory references, a Consultation Paper on Duty of Responsibility, a Consultation Paper on non-executive directors, a Discussion Paper on the legal function, a Consultation Paper on whistleblowing in foreign branches and a Consultation Paper on remuneration in CRD IV firms. The announcement notes that the Senior Managers’ and Certification Regime has been functioning for 6 months and today’s publications give information about the Regime and move to strengthen it.

what hope of suing the troika over austerity? September 21, 2016

Posted by Bradley in : eu, financial regulation , add a comment

In an article with the title Austerity-hit citizens allowed to sue troika, ECJ rules, which discusses the implications of the decision in Ledra Advertising v Commission and ECB (Judgment) [2016] EUECJ C-8/15 (20 September 2016), Nicole Sagener writes:

Green MEP Sven Giegold said it was a “breakthrough for the protection of fundamental rights”and announced that he would endeavour to support any citizens looking to seek compensation from the troika. Giegold added that people who have been affected in countries like Greece, Portugal, Ireland and Cyprus finally have legal means by which to have their cases heard.

The article does note some caveats expressed by Andreas Fischer-Lescano: it’s not a “blank check” and will only apply in “extreme cases.”
To me the decision is another example of the Court nodding in the direction of the protection of human rights while emphasizing that they are not absolute. The Court states (in para 70, but this is not new):

restrictions may be imposed on the exercise of the right to property, provided that the restrictions genuinely meet objectives of general interest and do not constitute, in relation to the aim pursued, a disproportionate and intolerable interference, impairing the very substance of the right guaranteed

The need to protect financial stability, the Court says, is an objective of general interest for the EU:

Indeed, financial services play a central role in the economy of the European Union. Banks and credit institutions are an essential source of funding for businesses that are active in the various markets. In addition, the banks are often interconnected and certain of their number operate internationally. That is why the failure of one or more banks is liable to spread rapidly to other banks, either in the Member State concerned or in other Member States. That is liable, in turn, to produce negative spill-over effects in other sectors of the economy…In view of the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of financial losses to which depositors with the two banks concerned would have been exposed if the latter had failed, such measures do not constitute a disproportionate and intolerable interference impairing the very substance of the appellants’ right to property. Consequently, they cannot be regarded as unjustified restrictions on that right.

Imagining circumstances in which EU institutions stated they needed to take urgent action to protect financial stability and the court said that the action was an unjustified interference with fundamental rights is. I think, difficult.