Dealing with Disruption: Emerging Approaches to Fintech Regulation

“Fintech” refers to a variety of digital assets, technologies, and infrastructure that deal with the operation of today’s financial markets. The regulation of this presents both legal and regulatory challenges. This article examines the regulatory responses to fintech disruption; specifically, the “experimentation” approach, the “incorporation” approach, and the “accommodation” approach. These approaches provide a baseline for further discussion and policy analysis in response to “Fintech.

The Dodd-Frank Act: A New Deal for a New Age?

This short essay is an attempt to present a few early big picture observations on the broad regulatory philosophy underlying the Dodd-Frank Act. The question raised here is whether the Dodd-Frank Act, in fact, provides a blueprint for the twenty-first-century version of the New Deal - a qualitatively new approach to resolving the regulatory challenges posed by today\u27s financial markets. Answering this complex question in full is hardly possible at this stage in the process, when many critical details of the new legal and regulatory regime are yet to be determined. Nevertheless, it is worthwhile to reflect upon some of the overarching themes built into the foundation of the Act, bound to shape the course of the ongoing reform

From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act

This Article examines the recent history and implementation of one of the central provisions in U.S. banking law, section 23A of the Federal Reserve Act. Enacted in 1933 in response to one of the perceived causes of the Great Depression, section 23A imposes quantitative limitations on certain extensions of credit and other transactions between a bank and its affiliates that expose a bank to an affiliate\u27s credit or investment risk, prohibits banks from purchasing low-quality assets from their nonbank affiliates, and imposes strict collateral requirements with respect to extensions of credit to affiliates. The key purpose of these restrictions is twofold: to protect federally insured depository institutions from excessive credit exposure to their affiliates, and to prevent transfer of federal subsidy to nondepository financial institutions. After the enactment of the Gramm-Leach-Bliley Act of 1999, which removed the Glass-Steagall era prohibition on affiliation between commercial banks and investment banks, section 23A effectively became the principal statutory safeguard preventing the depository system from subsidizing potentially risky activities of nonbanking institutions. However, despite its officially endorsed significance, section 23A remains a largely obscure statute that has not attracted much scholarly attention to date. This Article seeks to fill that important gap and to explore how effective section 23A is in achieving its purported goals in practice. It examines the body of interpretive letters issued by the Board of Governors of the Federal Reserve System (the Board ) between 1996 and 2010, in which the Board granted individual banking institutions\u27 requests to exempt their proposed transactions with affiliates from the requirements of section 23A. This Article argues that section 23A falls short of delivering the kind of robust protection for the depository system it allegedly promises, primarily because it was not designed for fulfilling such a grand task. This mismatch between its professed function and practical efficacy became particularly clear during the global financial crisis of 2007-2009. The Article puts together a comprehensive record showing how the Board\u27s use of exemptive authority effectively rendered section 23A irrelevant during the crisis, by allowing commercial banks to provide financing to their affiliated securities firms, derivatives dealers, money market funds, and even automotive companies, in order to prevent potentially disastrous effects of their failure on the financial system and the broader economy. Crisis containment and systemic risk considerations consistently prevailed over the statutory purpose of preventing the leakage of the federal subsidy outside the depository system. This Article further argues that the recent amendments to section 23A under the Dodd-Frank Act of 2010 fail to address this fundamental tension in the operation of the statute. The Article concludes with a discussion of potential implications of this argument for future financial regulatory reform

License to Deal: Mandatory Approval of Complex Financial Products

This Article explores the possibility of creating a system of mandatory pre-approval of complex financial products as an ex ante solution to the problem of systemic risk containment. Building on the concept of regulatory precaution borrowed from environmental and health law, and elements of pre-CFMA regulation of commodity futures, the Article outlines the broad contours of a new licensing scheme that would place the burden of proving social and economic utility of complex financial instruments on the intermediaries that structure and market them. Fundamentally a thought experiment, this proposal seeks to enrich the current policy debate by expanding the range of potentially plausible reform options

Dealing with Disruption: Emerging Approaches to Fintech Regulation

“Fintech” refers to a variety of digital assets, technologies, and infrastructure that deal with the operation of today’s financial markets. The regulation of this presents both legal and regulatory challenges. This article examines the regulatory responses to fintech disruption; specifically, the “experimentation” approach, the “incorporation” approach, and the “accommodation” approach. These approaches provide a baseline for further discussion and policy analysis in response to “Fintech.

Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure

This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms\u27 internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market-on a macro- rather than micro- level-would profoundly, and far more effectively, alter individuals\u27 and firms\u27 normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound - and to do so on a systemic level

Dealing with Disruption: Emerging Approaches to Fintech Regulation

“Fintech” refers to a variety of digital assets, technologies, and infrastructure that deal with the operation of today’s financial markets. The regulation of this presents both legal and regulatory challenges. This article examines the regulatory responses to fintech disruption; specifically, the “experimentation” approach, the “incorporation” approach, and the “accommodation” approach. These approaches provide a baseline for further discussion and policy analysis in response to “Fintech.

Wall Street as Community of Fate: Toward Financial Industry Self-Regulation

This Article proposes an approach to regulatory design that aims to create structural incentives for the emergence of a new model of embedded self-regulation in the financial industry. Without a doubt, the ideas laid out in this Article are more of a thought experiment than a polished set of fully developed regulatory proposals. These ideas and suggestions need a great deal of additional thought and a deeper, more granular and rigorous analysis of their potential consequences, benefits, and costs. Moreover, this Article explores only how to create conditions conducive to the emergence of comprehensive industry self-regulation that is embedded in the broader public interest and regulatory goals. It does not directly address what the ideal new model of financial industry self-regulation should look like or what mechanisms are needed to assure its effectiveness, legitimacy, and accountability. These critically important and highly complicated issues will require further research and analysis. The purpose of this Article is far more modest: to expand the boundaries of the debate on the future of global financial regulation and to start a serious discussion of all potential paths to reform, including the largely neglected and underexamined self-regulatory path