Faculty Bibliography
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Hal S. Scott, The Competitive Impact of Financial Regulatory Reform, 26 J. Int'l Banking L. & Reg. 527 (2011).
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Regulatory reforms in the wake of the global financial crisis have made some useful corrections to US and international financial markets. Unfortunately, some of the changes could weaken the competitiveness of US financial institutions. All regulatory proposals should be based on rigorous cost-benefit analysis, and competitive impact should be an important consideration. There are five areas where competitive impact could be particularly important: public support for financial firms; the designation and regulation of systemically important financial institutions; the Volcker Rule; regulations governing derivatives; and capital requirements. As a general matter, without much more international co-ordination, regulatory reforms risk creating significant competitive distortions.
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Capital requirements are a key element in containing systemic risk. This article argues that the market needs to play a more significant role in determining these requirements. The Basel process has a bad track record and there are inherent methodological and political difficulties in a group of regulators, particularly an international one, determining the appropriate amount of capital for a given risk. An added role for the market depends, however, on fuller disclosure by banks of their risks and minimization of the moral hazard created by bailouts, so creditors and counterparties bear a fuller measure of the risk.
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The central problem for financial regulation is reducing systemic risk. Systemic risk is the risk that the failure of one significant institution can cause or significantly contribute to the failure of other significant institutions. This paper addresses the five most important policies for dealing with systemic risk: the imposition of capital requirements, the use of clearinghouses and exchanges for over-the-counter derivatives, the resolution of insolvent institutions, emergency lending by the Federal Reserve and the structure of the regulatory system. The author also argues that the Volcker Rules and related limitations on bank size would not reduce systemic risk.
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Hal S. Scott, A General Evaluation of the Dodd-Frank U.S. Financial Reform Legislation, 25 J. Int'l Banking L. & Reg. 477 (2010).
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Hal S. Scott, The Global Financial Crisis (Foundation Press 2009).
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This timely book is an up-to-date view of the nature of the global financial crisis and the various statutory, regulatory and policy responses to it. As such, it focuses on recent developments and underlying policy issues. It looks closely at financial and economic aspects of the recent credit crisis as well as the purely legal dimensions. By its nature, it is cross-disciplinary. This book is a valuable tool for any law student looking to understand the legal and regulatory factors implicated in the global credit crisis.
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Hal S. Scott, What to Do About Foreign Discriminatory Forum Non Conveniens Legislation, 49 Harv. Int'l L.J. Online 95 (2009).
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The U.S. insurance industry is primarily regulated by the states. This is in contrast to the regulatory structure for other financial intermediaries which have a significant federal regulator. Banks, for example, may choose to be regulated by either the federal government or by the states. Recent legislation proposes to provide a similar optional federal chartering (OFC) system for insurers. Given the proposed legislation we make two contributions to the discussion. First, we examine the case for optional federal charters focusing on the costs and benefits of regulation at the federal versus the state level and conclude that and optional federal chartering system dominates the status quo. Second, we add to the discussion by describing what additional issues need to be addressed if we adopt an insurance OFC system. While the merits of OFC have been much debated, comparatively little consideration has been given to the matter of how such a system should function if enacted.
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Hal S. Scott, Use of International Financial Reporting Standards by Foreign and US Issuers, 23 J. Int'l Banking L. & Reg. 238 (2008).
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In November 2007, the Securities and Exchange Commission (SEC) took the historic decision to allow foreign issuers of securities in US public markets the option of stating their accounts using international financial reporting standards (IFRS), without reconciliation to US generally accepted accounting principles (US GAAP), for financial years ending after November 15, 2007. Such foreign issuers could also, as some have already done, continue to state their accounts in US GAAP. This naturally raised the issue as to whether US issuers should be given the same option, or even more radically, whether such issuers should be required, as of a date certain, to state their accounts in IFRS. My view is that US issuers need an option to permit operational cost savings and perhaps even achieve a lower cost of capital. But for now, the option should neither be perpetual nor conditioned upon a plan to require US issuers to use IFRS.
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One of the factors widely believed to have contributed to the Asian financial crisis was the dependence of the region on external short-term dollar-based financing from banks. The Asian Bond Markets Initiative (ABMI) which was launched in Manila in 2003, aims to solve this problem by developing efficient and liquid government and corporate bond markets in Asia. There are two fundamental ways for a group of countries to create an integrated bond market - onshore and offshore. Onshore integration requires that each participating country permit its issuers to raise capital by issuing bonds in foreign countries to foreign investors and to permit its investors to invest in foreign securities in their own countries. In addition, for regional issuance to be efficient, so that issuance in all countries could take place under the same rules, all countries participating in the arrangement would have to have similar securities laws and regulations, or allow a foreign issuer to issue in their markets under its home-country rules. This paper argues that offshore integration provides a better model. Countries must permit their issuers (government or corporate) to raise funds offshore from domestic and foreign investors in participating countries. In addition, participating countries must permit its investors to invest in offshore securities. The offshore model does not require harmonization or deference to the use of home country rules in host countries. Harmonization, and the resulting efficiency, is achieved by issuers and investors operating under the rules of the offshore center.
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Hal S. Scott, Optional Federal Chartering of Insurance: Design of a Regulatory Structure (Harv. Pub. L. Working Paper No. 07-05, Networks Fin. Inst. Pol'y Brief No. 2007-PB-04, Mar. 2007).
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This paper examines the design of a federal regulatory structure for insurance companies in the United States, assuming some form of an optional federal charter is adopted. Any design must take account of the objectives of insurance regulation, the convergence of financial service powers among banks, securities, and insurance firms, the types of lines to be regulated at the federal level, and problems posed by the possible participation of nationally chartered insurers in state residual pools and guaranty funds. This paper argues that the creation of a new federal insurance regulator should be accompanied by more consolidation and less fragmentation in the overall federal regulatory structure, by placing the new regulator within an operationally strengthened President's Working Group on Financial Markets. Ideally, a new optional federal charter should provide a real federal option by having the federal government fully regulate the safety and soundness and product lines of all insurers choosing the federal option. However, if lines were to be split between federal and state regulation, safety and soundness regulation of all insurance companies choosing a federal option should take place exclusively at the federal level, leaving the states with responsibility for consumer protection regulation in non-federal lines. While state guaranty funds have functioned effectively overall, a national guaranty fund would have the advantage of uniting responsibility for insurance and safety and soundness regulation, as in the case of banking.
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Hal S. Scott, International Finance: Rule Choices for Global Financial Markets, in Research Handbook of International Economic Law 361 (Andrew T. Guzman & Alan O. Sykes eds., Edward Elgar Pub. 2007).
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Hal S. Scott, What is the United States Doing About the Competitiveness of its Capital Markets?, 22 J. Int'l Banking L. & Reg. 487 (2007).
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The U.S. system of dividing regulatory authority between the states and the federal government takes on a very different cast for three important financial firms, banking, securities and insurance. According to the Federal Reserve, at the end of 2005, total assets held by these three types of firms were $11.82 trillion, $10.5 trillion and $5.6 trillion, respectively. In banking, federal regulatory power preempts state authority over nationally chartered banks, while state power is primary for state-chartered banks, subject to significant federal constraints on risk. In insurance, state regulatory power preempts federal authority (reverse preemption) for all insurance firms. In between these federalist poles are securities offerings and securities firms that are concurrently subject to state and federal regulation. However, there has been a recent trend of increasing federal preemption in the securities field. It seems odd that we have three different approaches to preemption for three different activities that are increasingly offered in integrated financial service firms. This paper advocates that insurance adopt the dual chartering approach of banking, with complete federal preemption for nationally chartered insurance firms, and that federal preemption be further extended for securities offerings and firms.
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In this monograph we address several interrelated themes influencing the corporate governance debate in today's financial marketplace. These include board independence and effectiveness; the role and the independence of the auditor; shareholder rights and activism; and convergence to a global corporate governance system. Our multi-jurisdictional approach sheds light on fundamental differences in existing governance practices globally given differing approaches to the role of the board, audit practices and ownership structure. We argue that no one system of corporate governance is the benchmark for all companies in all jurisdictions and no system of governance is without its own vulnerabilities. We address comparative aspects of corporate governance practices, including those between the US and UK, and observe that within an Anglo American context the UK offers a viable alternative approach to the US regulatory environment through its comply or explain framework, which includes advantages of being less prescriptive and legalistic. We conclude that while voluntary corporate governance standards have important benefits of flexibility over more prescriptive approaches to governance regulation, investors must take responsibility and play an engaged role in making the comply or explain system a credible alternative to a more prescriptive approach to corporate governance regulation. This raises the role of investor governance as a key component of the overall system of corporate governance.
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Hal S. Scott, The Need for a New Look at Capital Markets Regulation Post-Enron, 21 J. Int'l Banking L. & Reg. 169 (2006).
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The Enron scandal and the scandals that followed it, together with losses incurred by investors from the burst of the dot.com bubble, triggered a revolution in the regulation of the US capital markets beginning in 2000. Over five years later, it is time to re-examine the revolution's effects.
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This paper is a preliminary draft of a chapter for eventual inclusion in the Handbook of International Economic Law, edited by Andrew T. Guzman and Alan O. Sykes, forthcoming 2006 from Edward Elgar Publishing. The chapter is a survey of the field of international finance from the perspective of law and regulation. Its principal focus is the decision as to what rules to apply in the regulation of banking, securities and sovereign debt - home or host country, or international.
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This book is timely since the Basel Committee on Banking Supervision at the Bank for International Settlements is in the process of making major changes in the capital rules for banks. It is important that capital adequacy regulation helps to achieve financial stability in the most efficient way. Capital adequacy rules have become a key tool to protect financial institutions. The research contained within the book covers some key issues at stake in the capital requirements for insurance and securities firms. The contributors are among the leading scholars in financial economics and law. Their contributions analyze the use of subordinated debt, internal models, and rating agencies in addition to examining the effect on capital of reinsurance, securitization, credit derivatives, and similar instruments. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/0195169719/toc.html
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Hal S. Scott, Market Discipline for Financial Institutions and Sovereigns, in Market Discipline Across Countries and Industries 69 (Claudio Borio, William C. Hunter, George G. Kaufman & Kostas Tsatsaronis eds., 2004).
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This article explores whether a more formal bankruptcy procedure, the "Sovereign Debt Restructuring Mechanism" (SDRM) as proposed by the IMF, or in some modified form, is needed to deal with sovereign debt problems. The key consequences of the invocation of such a procedure would be a standstill on creditors' collections of principal and interest, a stay on creditors' attachments or foreclosures on assets, and new money priority for any funds lent to a sovereign during the duration of the procedure. Negotiations would ensue between the sovereign and the creditors over the terms of restructuring, with super-majority voting on acceptance of any restructuring plan. Once accepted, creditors could not holdout by asking courts to enforce the original terms of their debt instruments. The article also explores whether more widespread use of collective action clauses (CACs) in sovereign bonds would be an alternative to SDRM. The article proposes that credible restraints be placed on IMF and official lending since without such constraints sovereigns will not have sufficient incentives to restructure. It further proposes that the G-7 efforts to encourage CACs be abandoned since they will not be adopted and cannot solve the restructuring problem. It then recommends a modified SDRM that is more creditor friendly. The modifications would require: (1) the development of a benchmark on debt valuation to insure creditors receive fair value in a reorganization; (2) the inclusion of all debt, except secured debt, in the process - specifically multilateral, official and domestic debt - to eliminate debt discrimination; (3) the use of cramdown; and (4) minimization of the role of the IMF.
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Hal S. Scott & Philip A. Wellons, International Securities Regulation (Found. Press 2002).
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This casebook is designed to be used in conjunction with a general securities regulation course or a separate course on international securities regulation. Part One overs securities regulation in the three major markets in the world: the United States, the European Union, and Japan. Part Two deals with international and offshore markets, and Part Three deals with two important infastructure topics, capital adequacy and clearance and settlement.
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This monograph is the US Shadow Financial Regulatory Committee’s critical and constructive response to the June 1999 proposal of the Basel Committee on Bank Supervision — the international body of bank supervisors from the G-10 countries plus Luxembourg and Switzerland — for reforming international bank capital standards that have been in place since 1989. The topic is an important one, as the recent waves of banking crises in both developed and developing economies have illustrated. Demonstrating that the Basel standards have been a distorting and, on the whole, an ineffectual means of linking minimum capital requirements to bank risk, the authors propose a different approach that focuses on market discipline for large banks to supplement regulatory discipline, as well as to ensure that capital standards are credibly enforced. The centerpiece of the Shadow Financial Regulatory Committee’s proposal is a new subordinated-debt requirement, which, along with complementary reforms, would bring market forces to bear in measuring bank risk and rewarding proper bank risk management. That proposal would provide new information to supervisors and regulators, make the supervisory and regulatory process more effective and accountable, and create a reliable independent mechanism for disciplining bank behavior.
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This book includes updated papers written by academics and practitioners from Europe and the United States and presented at the Genoa Seminar on European Investment Markets, held in November 1996.
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This book adopts a public policy perspective in its examination of the way capital market intermediaries fund their market operations in eight of the most dynamic countries of East and Southeast Asia: Hong Kong Indonesia Korea Malaysia the Philippines Singapore Taiwan Thailand. Concerns about the ability of securities firms to fund themselves came into prominence in the world's major financial markets during the 1980s. It is striking that similar concerns had not surfaced about the Asian capital markets, particularly given the weakness of their money markets. As the forces limiting demand for funds change in the future, the financial systems examined will encounter problems in responding to the new demands for liquidity. The strength of this book lies in its analytical and comparative approach, rather than simply acting as a descriptive tool.
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Although one objective of the Basle Accord was to diminish competitive inequality among banks arising from differences in national capital standards, the Accord has not significantly leveled the playing field between US and Japanese banks because of differences in safety net policies, national accounting and tax rules and approaches to bank regulation.
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David C. Cole, Hal. S. Scott & Phiilip A. Wellons, Asian Money Markets (Oxford Univ. Press 1995).
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The countries of East and Southeast Asia have the world's most dynamic money markets. Essential to the Asian economy, their performance plays a crucial role in the successful development of other financial markets, such as those for business and consumer loans. This original study of the effect of government policy on the performance of money markets in the economies of this region (Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, and South Korea) is the only comprehensive book addressing this topic available today. Individual chapters were written by experts in the field, and were guided by a common research methodology. This book will be of great value to Pacific Basin specialists, bankers, academics, and public policy planners in finance.
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Hal S. Scott, The Competitive Implications of the Basle Accord, 39 St. Louis U. L.J. 885 (1995).
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Papers from the Fourth Biannual Conference of the International Academy of Commercial and Consumer Law, Melbourne, Australia, August 1988.
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By requiring foreign banks to operate through a U.S. subsidiary, the United States does exercise more control over the safety and soundness of the foreign bank's presence in the United States. A U.S. bank could support U.S. banking activities conducted through interstate branches with the entire capital of its bank, whereas a foreign bank operating through interstate branches of a U.S. subsidiary could support only those banking activities with the capital of that subsidiary. The Basel Accord, together with a U.S. requirement that banks operating through branches in the United States comply with the accord, minimizes the competitive inequality that might otherwise result if foreign and U.S. banks were subject to different capital requirements.
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Hal S. Scott, Commentary, An Evaluation of the Case for Receiver Finality, in The United States Payment System: Efficiency, Risk and the Role of the Federal Reserve 181 (David B. Humphrey ed., 1990).
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Proceedings of a Symposium on the U.S. Payment System sponsored by the Federal Reserve Bank of Richmond. This commentary evaluates the case for mandating a receiver finality rule requiring banks to give customers unconditional credit at the time accounts are credited for incoming funds transfers but before settlement occurs. This rule would prevent banks from contracting with customers to make credits conditional on settlement. The commentary begins by showing that the importance of receiver finality depends on the degree of settlement finality. It then examines the basic economics of risk reduction in a funds transfer network and concludes that there is no need to displace contracts as to receiver finality under perfect market assumptions. It then examines whether there are market imperfections—externalities, misperceptions of risk, or the presence of a Fed settlement guarantee—which justify such displacement. It acknowledges that the presence of a widely perceived Fed guarantee gives inadequate incentives for risk reduction efforts by banks but concludes that mandated receiver finality is not the answer to this problem.
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Hal S. Scott, Where Are the Dollars? Off Shore Fund Transfers, 3 Banking & Fin. L. Rev. 243 (1989).
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Offers observations on the controversy regarding judge Douglas Ginsburg's use of marijuana drug. Information on interviews given by the author after Ginsburg's nomination for the U.S. Supreme Court; Author's views on whether he considered Ginsburg guilty of the drug use; Claim made by a periodical that the author had seen Ginsburg smoke marijuana.
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The market for financial services in the United States has long been characterized by a series of federally-imposed geographic restrictions and service-market divisions. Congress enacted these restrictions to prevent both banks and their holding companies from engaging in certain business activities and to restrict their ability to expand across state lines. Because such restrictions have substantial anti-competitive effects, and are not necessary to protect the safety and soundness of depository institutions themselves, this Policy Essay proposes the repeal of current regulations of the activities of bank holding companies. At the same time, the payment system — various arrangements for transferring value, other than cash, between two parties — must be protected from the unacceptable risks of deregulation by prohibiting unregulated depository institution affiliates from processing payments through commonly owned depository institutions.