Hal Scott

An op-ed by Hal Scott. All 34 of the largest banks in the United States, representing over 75 percent of U.S. banking assets, recently passed the Federal Reserve Board's annual stress tests for the first time since the tests were created in 2011. However, celebration is very premature. The Fed's stress tests require banks to have sufficient capital to withstand levels of losses greater than the losses they suffered in the 2008 crisis. This latest test, based on economic assumptions released in February 2017, assumed that quarterly GDP growth would fall by 10.6 percent and the unemployment rate would hit 10 percent by mid-2017. In actuality, GDP is growing at 2 percent annually and the unemployment rate is under 5 percent.

An op-ed by Hal Scott. A key purpose of an Italian withdrawal from the euro area would, of course, be currency redenomination: providing that contracts and instruments (including sovereign bonds) in euros could be repaid in a new, devalued national currency. The stark reality is that Italy could not successfully do so without the agreement of the EU and other major markets around the world. The process of making redenomination effective within a withdrawing Member State, between Italian debtor and creditors, is relatively straightforward. Italy simply would pass legislation providing that in Italy all contracts specifying payment in euros — from government bonds to commercial loans to home mortgages — were to be satisfied in the new lira.

An op-ed by Hal Scott. Somewhere in the United States right now, an entrepreneur is having trouble getting a small-business loan for expansion. The reason? The bank is committed to keeping a large portion of its money in government debt instead. After the financial crisis, the government, in the form of the Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Corporation, imposed liquidity requirements that force American banks with assets over $50 billion to hold huge amounts of government debt as liquid assets...American banks are truly awash in government debt at five times pre-crisis levels. If President Trump wants to follow through on his promise to increase lending to small businesses, he should start by scaling back these requirements.

An op-ed by Hal Scott. Over the past 10 years the number of initial public offerings in the US, and the total amount of equity raised by them, are way down on historical averages. If these had held there would have been more than 3,000 new public companies in the past decade. Instead, we have had fewer than half the number of IPOs. Against that, private companies in the US, including the likes of Lyft and SpaceX, are raising a record amount of equity capital in private markets. Private companies raised almost $120bn through private offerings in 2016, according to the Committee on Capital Markets Regulation, a policy group. Last year US IPOs raised $24bn in equity, compared with a historical average of nearly $60bn.

President Trump’s promised bonfire of Obama-era banking legislation is unlikely to happen, according to an emerging consensus among Wall Street bankers, lawmakers and regulators. Instead, bankers are switching their deregulation hopes to a changing of the guard of US bank supervisors, who have considerable scope to loosen the shackles on banks within the bounds of existing law...Hal Scott of Harvard Law School, who was earlier in the running to be the Fed’s new regulatory chief, said that excessively cautious and secretive stress testing was the “binding constraint” on bank capital. “That’s untenable,” he said.

Capital Markets Regulation President Hal Scott discusses U.S. trust for Wall Street and government regulatory positions that need to be filled. He speaks with Tom Keene on "Bloomberg Surveillance."

Hal Scott, Harvard Law School professor and president of Committee on Capital Markets Regulation, discusses the Trump administration's approach to financial regulation and how it relates to the Federal Reserve and monetary policy. Scott is a potential candidate to be the next Vice Chair of the Federal Reserve.

David Nason, a General Electric (GE.N) executive and former Treasury Department official, has told the White House he is no longer interested in serving as the Federal Reserve's bank supervision chief. Nason, who heads GE's Energy Financial Services division, had been seen as a leading candidate for the vice chair for supervision position, a critical role in efforts by the administration of President Donald Trump to revamp financial rules...Harvard Law School professor Hal Scott, whose work has focused on financial firms, regulation and capital markets, is still in the mix for the job, a person familiar with the matter told Reuters. Scott is director of the Committee on Capital Markets Regulation, a research group made up of financial industry representatives and academics that has been critical of financial regulations.

The Trump administration has broadened its search for a key regulatory job at the Federal Reserve, according to people familiar with the matter, meeting in recent weeks with at least two people about the post of Fed vice chair in charge of bank oversight. President Donald Trump hasn’t announced who he will nominate to the currently vacant post, and his decision won’t be final until that happens...The administration is still said to be considering David Nason, a former Treasury Department official in the administration of President George W. Bush...President Trump’s team also recently met with Richard Davis, the chief executive of U.S. Bancorp, and Hal Scott, a professor at Harvard Law School, according to people familiar with the matter...Mr. Scott declined to comment.

An op-ed by Hal Scott. The Trump administration's top financial regulatory priority should be a review of government-mandated bank capital requirements. In order to achieve economic growth, President Trump should adopt a more market-based approach. According to the Federal Deposit Insurance Corporation, bank capital in the United States stands at a record high of $1.9 trillion, an increase of $630 billion, or 50 percent, over the pre-crisis amount. This increase is almost double the equity raised from all IPOs in the United States since 2008. Academic research shows that high capital requirements reduce bank lending and economic growth.

An op-ed by Hal Scott. Under the Trump Administration we can expect that there will be many changes at the Securities and Exchange Commission. One important area that has gone largely ignored and is ripe for reform is the system of “unelected directors” for public companies. The Committee on Capital Markets Regulation—a policy group with executives from across the financial sector and leading academics—recently studied how boards of directors of public companies respond to unfavorable votes by their shareholders. The Committee’s startling discovery is that, in 85% of cases where a director does not receive a majority of shareholder votes, the director will continue to serve on the board for at least two more years.

Main Street banks believe they've been unfairly swept up by the tsunami of regulation triggered by the 2008 Wall Street meltdown. But President-elect Donald Trump and his allies have signaled a desire to reverse rules that are seen as burdensome for community banks, freeing them up to give more loans...But Hal Scott, director of a Wall Street-funded nonprofit called the Committee on Capital Markets, complained that Dodd-Frank "lumps in all other banks" beneath that "super level" of regulation. Scott, a Harvard Law School professor, said there is "growing consensus that the regulatory burden should be relieved for small community banks."

One junk-bond trader at Goldman Sachs Group Inc. earned more than $100 million in trading profits for the firm earlier this year, an unusual gain at a time when new regulations have pushed Wall Street to take fewer risks. The gains were the work of Tom Malafronte, a managing director on the bank’s high-yield-bond desk in New York. The 34-year-old trader bought billions of dollars in junk corporate debt on the cheap starting in January, then locked in profits as prices recovered, according to people familiar with the matter...It is difficult—if not impossible—to define clearly the difference between trades made to meet clients’ demands and those conducted just to make money, said Hal Scott, a professor with Harvard Law School who has testified before Congress about efforts to regulate the banking industry. “No one has been able to distinguish between market making and prop trading,” Mr. Scott said.

An op-ed by Hal S. Scott and John Gulliver. A new Securities and Exchange Commission rule goes into effect Friday that can restrict investors from withdrawing their cash from the money-market funds that were at the heart of the 2008 financial crisis. If the G-20's international regulator (the Financial Stability Board) has anything to say about it then a similar rule will soon apply to the $16 trillion invested in all U.S. mutual funds. This would be a dangerous mistake. The FSB's proposal is to charge investors' penalty fees if they try and sell their mutual-fund investment during a crisis and would even include a complete prohibition of such sales in extreme circumstances. It is expected to finalize its proposal later this year and then the SEC, U.S. Treasury and Federal Reserve are expected to promptly implement them in the U.S.

Wells Fargo...has come under fire for deceptive sales practices that led to the opening of about 2 million accounts without customer authorization. After facing a grilling on Capitol Hill, CEO John Stumpf retired effective immediately on Wednesday...For Hal Scott, Harvard Law professor and author of "Connectedness and Contagion," the black mark on Wall Street could have serious repercussions. "It really affects the ability of the federal government, and in particular the Fed, to be a lender of last resort to Wall Street if we go into another crisis," he said. "The more unpopular Wall Street becomes, the less possible it is for the Fed to support it in a crisis."

All it took was the threat of a $14 billion fine against Deutsche Bank for the word “contagion” to rear its ugly head. Global markets have been shaken up in recent weeks over fears that Deutsche Bank, a symbol of German financial might and Europe’s fourth-largest biggest bank by assets, cannot absorb a fine of that magnitude. The German government said flatly that it would not bail out the bank, leading to what some called market “panic” that Deutsche Bank could face a messy Lehman Brothers-style collapse and set off a global financial crisis...Those fears seem wildly overblown. “The bottom line is, I think the Deutsche Bank issues will be resolved and there won’t be any contagion episode,” said Hal S. Scott, a professor at Harvard Law School and the author of the recent book “Connectedness and Contagion.” “But it’s a wake-up call. Are we prepared if this ever happens again? The answer is ‘no.’” Professor Scott defines “contagion” as “an indiscriminate run by short-term creditors of financial institutions that can render otherwise solvent institutions insolvent because of the fire sale of assets that are necessary to fund withdrawals and the resulting decline in asset prices triggered by such sales.” He calls such contagion “the most virulent and systemic risk still facing the financial system today.”

Harvard University Professor Hal Scott doesn't think financial markets are safer eight years after the 2008 financial crisis. He said the government has a limited ability to bail out banks, something that saved the financial system from further turmoil in 2008. He also comments on the effectiveness of the extra capital banks are required to hold.

An op-ed by Hal Scott and John Gulliver. The stress tests that big American banks face each year are about to get more stressful. The Fed is planning to substantially increase—by an average of 57%, we calculate—the regulatory capital that the eight largest banks in the U.S. need to pass the annual tests. Had these expected higher capital levels been in effect this year, it is likely that the country’s four largest banks ( J.P. Morgan Chase, Bank of America, Wells Fargo and Citigroup ) all would have failed the test. As a consequence, they would have been barred from remitting more profits to their shareholders. The higher capital requirements will diminish these banks’ ability to lend, potentially affecting economic growth. That isn’t all: The Fed’s secretive process for designing stress tests might well be illegal. It likely violates the Administrative Procedure Act of 1946, requiring government agencies to be transparent and publicly accountable.

A new report out Thursday by a top group of executives at some of the country’s largest financial institutions finds the Federal Reserve may be engaging in illegal activity as it tries to regulate the banking sector. The Committee on Capital Markets Regulation, which includes executives from J.P. Morgan (JPM), Citigroup (C) and Goldman Sachs (GS), explains that it is the Fed’s "stress tests" on big banks that may be against the law...“This law makes clear that if an agency wants to do something that affects a large number of institutions, they must tell you [and] put it up for comment,” says Hal Scott, director of the Committee on Capital Markets Regulation and professor at Harvard Law School.