Faculty Bibliography

Over the past quarter century, consumer lending markets in the United States have become increasingly national in scope with large national banks and other federally chartered institutions playing an ever important role in many sectors, including credit card lending and home mortgages. At the same time, a series of court decisions have ruled that a wide range of state laws regulating credit card abuses and predatory mortgage lending practices are preempted at least as applied to national banks and other federally chartered institutions. Given the dominant role of federal institutions in our country’s lending markets, these rulings have narrowed the capacity of states to police local lending transactions. As an alternative to direct regulation, the California Assembly recently considered legislation designed to improve consumer understanding of financial transactions through educational efforts to be financed by a new state tax on income from certain problematic loans made to California residents by financial institutions, including national banks and other federally chartered institutions. In this Article, we consider whether a tax of the sort proposed in California could survive a preemption challenge under recent court rulings as well as other potential constitutional attacks. While the States have quite limited powers to regulate federally chartered financial institutions, Congress in 12 U.S.C. § 548 explicitly authorizes states to tax national banks. We explore the scope of state taxing authority that § 548 and the relationship between that authority and recent preemption rulings After reviewing a range of legal precedents, we conclude that a state tax of the sort considered in California—which impose modest levies on federally chartered entities but do not prevent these from engaging in otherwise authorized activities— should qualify as a legitimate exercise of state taxing powers under 12 U.S.C. § 548 and also should withstand scrutiny under the Due Process and Commerce Clauses to the extent the tax is imposed on out-of-state banks.

This article addresses whether yield spread premiums are harmful to consumers and, if so, how the practice might be regulated. Yield spread premiums are payments made to mortgage brokers by lending institutions based on the rate of interest charged on a borrower's loan, with higher interest rates producing higher yield spread premiums payments. While the legality and merits of these payments have been hotly debated over the past decade - in federal courts, before Congress, and elsewhere - little academic writing has seriously grappled with the fundamental questions this paper addresses. After describing the regulatory framework for yield spread premiums, the article reviews the unresolved empirical questions underlying the policy and legal debates over these payments. The article then presents an empirical study of approximately 3,000 mortgage financings of a major lending institution, the results of which suggest that yield spread premiums allow mortgage brokers to extract materially higher payments from consumers than in transactions without such payments. Contrary to claims of industry representatives, the study suggests that consumers fail to fully recoup the cost of these payments. Our best estimate is that consumers get less than thirty-five cents of value for every dollar of yield spread premiums. The study also provides evidence that the payment of yield spread premiums may allow mortgage brokers to engage in price discrimination among borrowers, with the least sophisticated borrowers being particularly susceptible to abusive pricing practices. The article concludes with a brief discussion of the implications of these results for the regulation of yield spread premiums.

This article begins with a discussion of the considerable difficulties of conducting a theoretically complete analysis of the costs and benefits of financial regulation, as well as the problems associated with making international comparisons between observed levels of the intensity of financial regulation. Notwithstanding these difficulties, the author next presents preliminary data about the direct regulatory costs of financial regulation in the US and offer some tentative international comparisons. Compared to at least the UK and Germany, the intensity of securities enforcement actions in the US appears to be strikingly higher. Not only are there more financial regulators in the US, but they also carry bigger sticks than their foreign counterparts. The article concludes with some thoughts about additional lines of research in this area and the implications of this data for the ongoing debate over regulatory convergence.

Although similarities between the British and American systems of financial regulation are often remarked upon in academic commentary, the organizational structure of financial supervision in the two countries has diverged substantially in the past decade, as the United Kingdom has now largely consolidated its financial regulatory agencies in the Financial Services Authority whereas the United States has maintained the world's most decentralized and fragmented collection of financial supervisory agencies. In this essay, Professor Howell Jackson explores various reasons why financial regulation in these two countries differs so dramatically in organizational structure. Focusing first on the differences in political economy that surrounded the enactment of the Financial Services and Markets Act of 2000 in the United Kingdom and the Gramm-Leach-Bliley Act of 1999 in the United States, Professor Jackson discusses deeper differences in the regulatory philosophies of the two countries and also presents data on the relative intensity of financial regulation in both jurisdictions. He speculates that the comparatively more ambitious regulatory agenda of the U.S. system pushes the country towards a more elaborate system of financial oversight that is inherently more difficult to consolidate. In the United Kingdom, in contrast, the goals of the financial regulators are more modest and, to the extent that cost efficiency is one of the country's regulatory objectives in the field of financial regulation, that policy tends to foster a less cumbersome system of financial regulation that more easily accommodates consolidation of regulatory functions. The paper concludes with some broader comparative data suggesting that while British financial regulation may be less intensive than financial regulation in the United States, it is substantially more intensive than financial regulation in many other jurisdictions, particularly civil law jurisdictions on the Continent.

Remote trading screens allow investors to trade on exchanges located in other jurisdictions. The Securities and Exchange Commission (‘SEC’) has generally prohibited the placement of foreign trading screens in the United States unless the associated exchange complies with US regulatory requirements. While the SEC defends its position as an essential investor protection, European officials complain that SEC requirements constitute an unfair barrier to trade. This article argues that technological advances have largely mooted this contro-versy. Current requirements do not protect US investors as much as the SEC claims nor do they inhibit competition as much as the SEC's critics assert. To the extent that alternative trading mechanisms already give US investors de facto access to unregulated foreign exchanges, the SEC may well choose to revisit its position on foreign trading screens, particularly as US and European financial markets become more integrated and disclosure requirements on both sides of the Atlantic converge over the next few years.

For most working Americans, Social Security benefits represent a significant financial asset, in many cases their principal or sole source of retirement income.1 According to the Social Security Administration (SSA), the aggregate present value of Social Security benefits promised to those age sixty-two and older was $4.3 trillion dollars in January 2003 (U.S. Social Security Administration 2003).

The EU Financial Markets Dialogue led by the SEC and the European Commission has achieved some notable successes, particularly with respect to the consolidated supervision of financial conglomerates and the development of a plan to achieve convergence in corporate financial reporting. On both sides of the Atlantic, there is a clear ongoing commitment to the dialogue as a key mechanism for the development of efficient and credible regulatory solutions that guarantee effective investor protection and a high level of business efficiency. This paper reports on a two-day roundtable discussion that took place at Cambridge University in September 2005 to explore ways in which the academic community can contribute to this transatlantic debate. Lively discussion between the policy-makers, regulators, market participants and academics who attended the roundtable yielded a number of thematic concerns, which, the paper suggests, could form the basis of a programme for further work. Finally, the paper announces the establishment of a seminar series, to be based in the United Kingdom, on the Transatlantic Financial Services Regulatory Dialogue and invites contributions.

Over the past few years, financial regulators have devoted considerable attention to the development of consolidated capital rules for financial conglomerates. This chapter explores the theoretical justifications for these new requirements and explains that the case for consolidated capital oversight consists of four separate lines of argument: technical weaknesses inherent in traditional entity-level capital requirements; unique risks associated with financial conglomerates; additional diversification benefits that financial conglomerates enjoy; and recognition that financial firms increasingly employ modern risk management techniques that work on a group-wide basis. The specific rules for consolidated capital requirements that the Basel Committee proposed in April 2003 are reviewed, and it is argued that the Basel proposals constitute a relatively rudimentary system of consolidated capital requirements, dealing primarily with the technical weaknesses of entity level capital and making little effort to deal with more subtle issues such as unique risks of financial conglomerates, diversification benefits, and modern risk-management techniques. A number of significant practical considerations contribute to the relatively limited scope of the Basel Committee's proposal, which will likely prevent the development of a more comprehensive system of consolidated capital oversight for financial conglomerates in the foreseeable future.

How well did the Social Security system do last year? According to the most recent annual report prepared by system's Board of Trustees, the Social Security trust funds showed a $165.4 billion net increase in assets in 2002 and reported accumulated reserves of nearly $1.4 trillion by year end. Unfortunately, these glowing reports are a cash-flow illusion, revealing only the difference between the system's annual cash receipts and its yearly payments for benefits and administrative expenses. Were the finances of the Social Security system restated under principles of accrual accounting, which recognizes commitments to make future payments when those obligations are actually incurred, the Social Security trust funds would have had to report a loss of several hundred billion dollars in 2002. Moreover, as of December 31, 2002, an accrual-based balance sheet of the Social Security system would have revealed more than $14.0 trillion of accrued liabilities to Social Security participants and beneficiaries. Even allowing for the system's $1.4 trillion of accumulated reserves as well as the value of excess future taxes to be paid by current participants over the rest of their working lives, the Social Security trust funds had unfunded obligations on the order of $10.5 trillion as of year-end 2002. This implicit debt of the Social Security system is several times greater than the explicit debt burden of the federal government and is growing by hundreds of billions of dollars each year. In addition to misrepresenting the magnitude of the Social Security system's looming financial crisis, the current accounting system for Social Security distorts public debate over Social Security reform proposals and confuses the relationship between Social Security and the rest of the federal budget. Accrual accounting, in contrast, would provide a clearer picture of the true state of the Social Security's current financial shortfall and the extent to which the system's burden on future generations is increasing each year. Accrual accounting would also create political incentives for our leaders to address Social Security's difficulties in a timely manner, and enhance the quality of public debate over the relative merits of competing reform proposals.

Accounting formats, bookkeeping, and legal aspects are introduced, followed by an overview of financial concepts in areas such as the relationship of time and money and corporate finance. This text is particularly suited to independent study or for use as a supplement to materials for courses in corporation law or contracts.

Author's reply to Commentary re: Accounting for Social Security and Its Reform, 41 Harv. J. on Legis. 59 (2004).

Responding to recent claims that looming federal surpluses would disrupt U.S. capital markets if partially invested in private financial assets, this short essay argue that projected surpluses are not so substantial when compared with the likely size of U.S. capital markets at the end of the end of the decade when the bulk of the surpluses are projected to arise. The essay also notes several reasons why Congress should retain discretion to invest in private financial assets under certain circumstances.

As the first installment of a two-part series, this Article reports the results of an empirical investigation designed to explore whether capital-raising practices in Europe in 1999 might illuminate the on-going debate in U.S. academic circles over the value of regulatory competition in international securities markets. Drawing on a series of 50 in-depth interviews with lawyers, investment bankers and regulators from London and other European financial centers, this Article presents new data about capital-raising practices in Europe in 1999. The authors find little evidence of the sort of market dynamics traditionally predicted by either proponents or critics or regulatory competition. Their research suggests that variations in the stringency of national systems of securities regulation across Europe is not a major factor in determining where and how European issuers access capital markets. Rather, European capital-raising practices seem to be heavily influenced by market forces that require issuers engaged in pan-European offerings to meet disclosure and due diligence standards modeled on and comparable to practices developed for private placements in the United States. The research also suggests that the growth of efficient trading linkages between European stock exchanges may diminish the need for European issuers to concern themselves with the legal requirements of other member states, a phenomenon not usually factored into discussions of regulatory competition in international securities markets.

This essay reviews recent debates over the allocation of regulatory authority in three separate fields of financial regulation: corporate governance, securities regulation, and the regulation of financial institutions. In each field, the essay argues, reform proposals can be organized into three basic groups: those that advocate centralization of regulatory authority; those that favor competition among governmental bodies; and those that recommend the privatization of regulatory standards. While this debate is most familiar in the field of corporate governance, highly analogous policy discussions are currently taking place in securities regulation and the regulation of financial institutions. This essay traces the development of arguments over the proper allocation of regulatory authority in various sectors of the financial services industry, noting differences both in the contexts in which the issue has arisen in various sectors of the industry and also in the ways regulatory authority is currently allocated in each sector. The essay concludes with several tentative thoughts about normative grounds on which debates over the proper allocation of regulatory authority might ultimately be resolved.

Governmental bodies are increasingly incorporating the work of private credit rating agencies into regulatory standards. In this comment, Professor Jackson examines how a recent proposal of Basel Committee on Banking Supervision would extend this practice by factoring the credit ratings of borrowers into capital adequacy requirements for commercial banks. After reviewing various criticisms of the Basel Committee's proposal, the Comment considers alternative approaches to measuring the credit risk of commercial banks and concludes with a discussion of implications for regulatory policy in a global financial services industry.

This volume of selected statutes and regulations is designed to supplement the casebook, Regulation of Financial Institutions (1999) by Jackson and Symons.

This essay reviews differences in regulatory structure across sectors of the financial services industry in the United States and then explores the difficulties these differences pose to our current system of regulation and also to proposals for financial modernization. The Essay begins with a description of a range of financial transactions from simple contracts to pooled investment vehicles to complex financial intermediaries. After reviewing the policy justifications underlying regulation across the financial services industry, the Essay summarizes the distinctive regulatory structures that characterize U.S. oversight of each major sector of the industry: private contract, securities regulation, futures contracts, investment companies, depository institutions, insurance companies, and employee benefit plans. The essay then reviews the legal definitions that are used to classify which regulatory structure applies to which financial transactions. Distinctions are drawn between formal and functional definitions of financial products, and the Essay claims that functional definitions, which suffer from both overinclusion and indeterminacy, are typically bounded by four types of limitations: de minimus exceptions, sophisticated investor exclusions, institutional carve-outs, and extra-territorial exemptions. The Essay continues to review a series of recent legal disputes in which private parties and government regulators have disagreed over the application of this system of classifying financial products. The Essay then draws some preliminary conclusions as to why disputes over legal classifications of financial products are so common and concludes by exploring the implications of the foregoing analysis for recent proposals to modernize the U.S. system of financial regulation.

This paper, which is to be published in a slightly altered form in a forthcoming Oxford University Press symposium volume on Regulatory Reform, addresses a problem confronting many developing countries: How should a country draw on foreign legal systems to develop its own system of financial regulation. Although addressed to a specific problem confronting the Kingdom of Nepal ? developing a regulatory structure that will encourage foreign financial firms to establish international operations in Nepal ? the paper presents a general framework for analyzing the utilization of foreign legal models for regulatory reform, and then advocates a particular reform strategy for Nepal: the selective incorporation of foreign legal systems into Nepalese law. Under the proposed system of selective incorporation, Nepal would first determine which foreign regulatory systems are sufficiently well-developed and well-administered to oversee foreign firms establishing international financial service operations in Nepal. Firms located in any of these selected jurisdictions could then apply to establish operations in Nepal without having to meet any additional Nepalese regulatory requirements, provided those applicant firms agreed to conduct their Nepalese operations in accordance with their home country?s regulatory requirements and to submit their Nepalese operations to home country supervision. So, for example, a British bank might establish operations in Nepal and be supervised under the law of England, whereas a Swiss bank with Nepalese operations might comply with Swiss law. In this way, selected foreign legal regimes would be incorporated into Nepalese law. After exploring the surprisingly large number of precedents for selective incorporation, this paper considers the advantages and disadvantages of this approach to regulatory reform for both Nepal and foreign financial firms. The paper then considers a number of possible objections to this approach, including the potential for inadequate supervision of Nepalese operations, the implications of the approach for countries whose laws are incorporated into Nepalese law, and the ramifications of the approach for the political economy of Nepal.

This paper, which is to be published in a slightly altered form in a forthcoming Oxford University Press symposium volume on Regulatory Reform, addresses a problem confronting many developing countries: How should a country draw on foreign legal systems to develop its own system of financial regulation. Although addressed to a specific problem confronting the Kingdom of Nepal ? developing a regulatory structure that will encourage foreign financial firms to establish international operations in Nepal ? the paper presents a general framework for analyzing the utilization of foreign legal models for regulatory reform, and then advocates a particular reform strategy for Nepal: the selective incorporation of foreign legal systems into Nepalese law. Under the proposed system of selective incorporation, Nepal would first determine which foreign regulatory systems are sufficiently well-developed and well-administered to oversee foreign firms establishing international financial service operations in Nepal. Firms located in any of these selected jurisdictions could then apply to establish operations in Nepal without having to meet any additional Nepalese regulatory requirements, provided those applicant firms agreed to conduct their Nepalese operations in accordance with their home country?s regulatory requirements and to submit their Nepalese operations to home country supervision. So, for example, a British bank might establish operations in Nepal and be supervised under the law of England, whereas a Swiss bank with Nepalese operations might comply with Swiss law. In this way, selected foreign legal regimes would be incorporated into Nepalese law. After exploring the surprisingly large number of precedents for selective incorporation, this paper considers the advantages and disadvantages of this approach to regulatory reform for both Nepal and foreign financial firms. The paper then considers a number of possible objections to this approach, including the potential for inadequate supervision of Nepalese operations, the implications of the approach for countries whose laws are incorporated into Nepalese law, and the ramifications of the approach for the political economy of Nepal.

Symposium: Banking Law, Commentary on Helen A. Garten's Whatever Happened to Market Discipline of Banks.