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This article discusses current trends in corporate governance and theorizes on the likely impact of those trends for the twenty-first century. Part II focuses on an overview of four current trends in the areas of technology, globalization, shareholder activism, and private ordering. Part III assesses the likely impact of those trends on corporate governance in the twenty-first century. A successful corporation will need to seamlessly integrate technology to act effortlessly across international time zones, and it will need to raise capital quickly and efficiently in different global capital markets. The authors posit that these needs will lead to the emergence of a universal entity, affording its creators maximum flexibility.
This chapter deals with fundamental issues of corporate insolvency law. Particular attention is paid to the agency problems related to “bankruptcy governance” and how these are addressed in various jurisdictions. Methodologically, the chapter is based on a functional approach that compares different legal regimes against the yardstick of economic efficiency. The structure of the chapter follows the issues as they arise in time in a corporate insolvency proceeding: objectives of insolvency laws, opening and governance of proceedings, ranking of claims and the position of secured creditors and shareholders, and rescue proceedings. The chapter also covers the contractual resolution of financial distress. It concludes with thoughts on the reasons for the identified jurisdictional divergences and an outlook on the worldwide efforts towards harmonization of (corporate) insolvency laws. In terms of jurisdictions, the chapter mainly draws on the corporate insolvency laws in the US, England, France and Germany.
Prior scholarship advocates for international harmonization of financial regulation as a solution to the problem of cross-border regulatory arbitrage. The scholarship is theoretical, and rests on the contention that financial institutions can simply depart from an unfavorable regulatory regime. This paper contributes an empirical foundation to the concern that financial institutions relocate following regulation, while also deeply qualifying claims that effective regulation requires international harmonization.
Using experience from swap markets following the Dodd-Frank Act, this paper provides the first empirical evidence that financial institutions migrate in response to derivatives regulation. This paper shows that U.S. banks substantially shifted inter-bank swap trading offshore while the delivery of swaps to U.S. customers did not decline.
Building on this case study, the article develops theory for what policy goals are more susceptible to subversion through migration. Policy goals concerned with regulating relationships between financial institutions and their customers (e.g., goals of customer protection) are less vulnerable to relocation than policy goals concerned with relationships between financial institutions (e.g., reduction of systemic risk). This distinction reflects pragmatic priors on the relative costs and benefits of cross-border arbitrage to providers of financial services and their customers.
In exploring how relocation skirted some regulations and alternative regulatory designs for achieving the same policy goals, the article solves a longstanding puzzle for international regulation. The claim that financial institutions can avoid territorially bounded regulation appears, on its face, suspect. If an institution truly removes its operations, what legitimate interest does a jurisdiction retain in regulating that institution? Through examining how operations may be restructured across borders, the article shows that a lack of harmonization: (a) does not affect whether a jurisdiction can in the abstract unilaterally implement its policy goals, but (b) does narrow the range of regulatory designs available to achieve policy goals. Absent harmonization, jurisdictions may be limited to regulatory designs that are more difficult to implement, for instance, due to political constraints or greater administrative burdens.
A core challenge for financial regulation is how best to address the inherent dynamism of finance. The financial system is engineered to change. Periods of stability, evolving macroeconomic conditions, and regulation are among the forces driving the constant shape shifting of finance. As a result, rules established at Time A often have a different substantive effect at Time B. And because efforts to reduce the cost of complying with regulatory burdens, commonly known as regulatory arbitrage, are among the forces driving this change, a static regulatory regime will tend to be inherently deregulatory.
Currently, the processes through which the law is made are ill suited to accommodate this dynamism. Frictions built into legislative and regulatory processes make it difficult to update the law even when the substantive impact of a proposed change merely replicates the originally agreed upon balance. Complicating matters further, changing market structures may make it impossible to replicate the precise balance a law had been designed to achieve. Financial regulation often entails tradeoffs among competing values and new environments and innovations may enable but also necessitate different tradeoffs.
There is no easy way to reconcile the dynamism of finance with the lawmaking processes better suited for static environments. Proscribing innovation may be warranted in some domains, but has real costs and is unlikely to be feasible as applied to the system as a whole. Nonetheless, recognizing this tension is a critical to understand why regulation has failed to achieve desired aims and why it may well fail again. This tension also helps to explain the heated debate about the scope of deregulation prior to the 2007-2009 financial crisis and its role contributing to that crisis. Only by grappling with the myriad reasons for financial innovation and the mixed impact of that innovation can we develop the common ground needed to forge a better approach.
Mechanisms of market inefficiency are some of the most important and least understood institutions in financial markets today. A growing body of empirical work reveals a strong and persistent demand for “safe assets,” financial instruments that are sufficiently low risk and opaque that holders readily accept them at face value. The production of such assets, and the willingness of holders to treat them as information insensitive, depends on the existence of mechanisms that promote faith in the value of the underlying assets while simultaneously discouraging information production specific to the value of those assets. Such mechanisms include private arrangements, like securitization structures that repackage cash flows from debt instruments to produce new financial instruments that are less risky and more opaque than the underlying debt, and public ones, like the rules allowing many money market mutual funds to use a net asset value of $1.00. This essay argues that recognizing these mechanisms of market inefficiency as such is a critical first step in devising policy interventions that achieve desired aims. This runs counter to the instincts of many market regulators, like the Securities and Exchange Commission, and academics who have often assumed that markets should be structured to promote information generation and efficiency.
The essay further shows, however, that defenders of the informationinsensitive paradigm have failed to provide a robust institutional account of how those mechanisms can remain robust across different states of the world or the government support required if they cannot. When an adverse shock or other signal raises questions about the value of the assets underlying an information‐insensitive instrument, market participants can refuse, en masse, to treat those instruments as safe. Unless the government or some other actor can provide credible information about the value of the underlying assets or financial support that renders such information irrelevant, widespread market dysfunction can follow. When that happens, the very mechanisms of market inefficiency that had enabled a market to develop can exacerbate dysfunction. Following Ronald Gilson and Reineer Kraakman’s admonishment that institutions always matter, this essay calls for the development of rich institutional accounts of how the mechanisms of market inefficiency work, when and how they can fail, and what these dynamics reveal about the role regulators should play in these domains.
This article analyzes the main problems and the solutions adopted in the market for Initial Coin Offerings (ICO), an alternative financing solution that has experienced spectacular growth and notoriety in recent years. This market relies on the use of Blockchain protocols and is, therefore, characterized as disintermediated, decentralized and unregulated. The problems we identify in this article, their severity, and the solutions currently being adopted to address them, lead us to conclude that it is unlikely that either of these characteristics will survive in the near future. Our results also indicate that the concerns expressed by regulators and other market agents regarding ICO markets are well founded. We find it particularly disturbing that such a new, revolutionary market already displays many of the problems of traditional financial markets, and that these problems were exactly the ones that occurred at the genesis of the last financial crisis.
Shocks that hit part of the financial system, such as the subprime mortgage market in 2007, can propagate through a complex network of interconnections among financial and non-financial institutions. As the financial crisis of 2007-2009 has shown, the consequences for the entire economy of such systemic risk materializing can be catastrophic. Following the crisis, economists and policymakers have become increasingly aware that the structure of the financial system is a key determinant of systemic risk. A wide consensus now exists among them that network theory is the natural framework for studying systemic risk. Yet, most of the existing rules in financial regulation are still “atomistic,” in that they fail to incorporate the fact that each individual institution is part of a wider network. This article shows that policies building upon insights from network theory (network-sensitive policies) can address systemic risk more effectively than traditional atomistic policies, also in areas where an atomistic approach would seem natural, such as the corporate governance of systemically important financial institutions. In particular, we consider four prescriptions for the governance of systemically important institutions (one on directors’ liability, two on executive compensation and one on failing financial institutions’ shareholders appraisal rights in mergers) and show how making them network-sensitive would both increase their effectiveness in taming systemic risk and better calibrate their impact on individual institutions.
For almost every type of company, the United States has just one body of securities regulation. Pet stores, hospitals, for-profit universities, and iron mines all have to comply with the same securities laws in basically the same way. There is, however, one important exception: investment funds. Mutual funds, closed-end funds, exchange-traded funds, hedge funds, private equity funds, and venture capital funds have their own special body of securities regulation that applies in place of or in addition to the regular securities laws that apply to other types of companies. Why? This 7,000-word essay, prepared for publication in the Research Handbook of Mutual funds, contemplates a number of possible answers and concludes that the most distinctive and legally salient feature of an investment fund is its structure. Investment funds divide their assets from their managements in much more radical ways than other types of companies. The surprising implication is that for purposes of regulation, an investment fund’s investments are much less important than its pattern of organization.
This Article analyzes the functioning of the European regulatory approach to the crisis of credit institutions, in the framework of EU banking supervision and in light of its early applications, with a special focus on bail-in. We investigate how the new resolution mechanisms — rooted in the principle of private sector involvement in banking restructurings — have inter-played with legal and institutional contexts still characterized by an attitude to bail-out rescues and by non-harmonized national insolvency rules. We show how and well-experimented restructuring tools have influenced the application of the new ones and, in many cases, have emphasized the defects, pitfalls and inconsistencies of the new regime, suggesting paths for reform.
The Article is organized as follows. Part II sets out a summary of the common regime applicable to credit institutions within the EU, based on harmonized requirements for capital and liquidity. Part III focuses on the pre-crisis and crisis tools, as spelled out in the Bank Recovery and Resolution Directive (“BRRD”), in coordination with bordering regulatory areas, such as the regimes applicable to the liquidation of insolvent banks and State aids in the context of banking rescues.
After a brief comparison with the US system (Part IV), we dwell, in Part V, on the practice of restructurings, before and after the BRRD. We specifically discuss two cases (the resolution of Banco Popular Español and the liquidation of Italian “Banche Venete”) that, in our view, illustrate very well the pros and cons of the new regime. Part VI concludes offering some suggestions for possible reform.
The Data Standardization Challenge: Forthcoming in Systemic Risk in the Financial Sector : Ten Years After the Great Crash
Data standardization offers significant benefits for industry and regulators alike, suggesting that it should be easy. In practice, however, the process has been difficult and slow moving. Moving from an abstract incentive-based analysis to one focused on institutional detail reveals myriad frictions favoring the status quo despite foregone gains. This paper explores the benefits of and challenges confronting standardization, why it should be a top regulatory priority, and how to overcome some of the obstacles to implementation. The paper also uses data standardization as a lens into the challenges that impede optimal financial regulation. Alongside capture and other common explanations for regulatory failures, this paper suggests that coordination problems, delayed benefits, and other banal, but perhaps no less intractable, challenges are often the real impediments to better financial regulation.