Credit Creation: Reconciling Legal and Regulatory Incentives

As international organizations adopt new legal standards to promote access to credit through the modernization of national secured transactions law, the lack of coordination with regulatory standards for banking institutions thwarts the effectiveness of these efforts. In recognizing the relevance of the problem, UNCITRAL - for the first time since its establishment - is currently considering how to coordinate secured transactions law reforms with the implementation of the Basel Accord. In a similar vein, the problem is currently approached by other international organisations. Although efforts at the national level to coordinate legal and regulatory standards are commendable, coordination between secured transactions law and capital requirements should be addressed at the highest level of the lawmaking process, i.e. when international soft-laws are defined. To advance this argument, the key functions of secured transactions law and capital requirements are isolated and a holistic understanding of the legal and regulatory rules governing the creation of credit is presented. The Article steers away from the idea that banks are mere intermediaries and offers a fresh understanding of the role of regulatory capital in controlling credit creation, through the management of risk. Within this context, the incentives created by secured transactions law and capital requirements are examined by comparing the capital charges for different credit protections, including credit derivatives and commercial loans to small business. First, it emerges that the implementation of new secured transactions law and the limited ability of security interests in personal property to reduce regulatory capital under the Basel Accords stimulate the creation of credit outside the banking system. Second, to control this phenomenon, the Article shows that it is essential to reconcile the incentive structures created by international legal and regulatory standards

Credit creation : reconciling legal and regulatory incentives

As international organizations adopt new legal standards to promote access to credit through the modernization of national secured transactions law, the lack of coordination with regulatory standards for banking institutions thwarts the effectiveness of these efforts. In recognizing the relevance of the problem, UNCITRAL - for the first time since its establishment - is currently considering how to coordinate secured transactions law reforms with the implementation of the Basel Accord. In a similar vein, the problem is currently approached by other international organisations. Although efforts at the national level to coordinate legal and regulatory standards are commendable, coordination between secured transactions law and capital requirements should be addressed at the highest level of the lawmaking process, i.e. when international soft-laws are defined. To advance this argument, the key functions of secured transactions law and capital requirements are isolated and a holistic understanding of the legal and regulatory rules governing the creation of credit is presented. The Article steers away from the idea that banks are mere intermediaries and offers a fresh understanding of the role of regulatory capital in controlling credit creation, through the management of risk. Within this context, the incentives created by secured transactions law and capital requirements are examined by comparing the capital charges for different credit protections, including credit derivatives and commercial loans to small business. First, it emerges that the implementation of new secured transactions law and the limited ability of security interests in personal property to reduce regulatory capital under the Basel Accords stimulate the creation of credit outside the banking system. Second, to control this phenomenon, the Article shows that it is essential to reconcile the incentive structures created by international legal and regulatory standards

Global regulatory standards and secured transactions law reforms : at the crossroad between access to credit and financial stability

The main argument of this article is that dissonances between secured transactions law and capital requirements stem from their different ethoi and hinder both access to credit and financial stability worldwide. To sustain this argument and advance the debate in both fields of law, it is necessary, first, to isolate the rationales and the operational logics of secured transactions law and capital requirements. The narrative sustaining and justifying the law of secured transactions is rooted in the idea that security interests, especially those in personal property, are the core engine for economic growth as they redress the problem of “dead capital”, that is, the mismatch between the assets held by individuals or companies and the assets that financiers are willing to accept as collateral. Through this lens, international organizations have been actively engaged in promoting law reforms that establish legal regimes that facilitate the conversion of dead capital into productive capital. The underlying assumption is that by preferring secured creditors over unsecured creditors, the use of collateral is facilitated and more credit is extended at a lower cost. Hence, law reformers strive to design a legal regime in which creditors and debtors are able to negotiate the terms of their consensual transactions to fit their idiosyncratic financing needs and risk appetites, while mandatory rules are largely imposed having in view the effects of security rights on third par ties. As illustrated in this Article , such a rationale permeates national laws and the international legal standards adopted by the United Nations Commission on International Trade Law (UNCITRAL) and the European Bank for Reconstruction and Development (EBRD

UCC Article 9 Registration System for Latin America [Article]

Secured Commercial Lending Reform and Economic Development in Latin America: Special Focus on Honduras and MexicoThis material published in Arizona Journal of International and Comparative Law is made available by the James E. Rogers College of Law, the Daniel F. Cracchiolo Law Library, and the University of Arizona Libraries. If you have questions, please contact the AJICL Editorial Board at http://arizonajournal.org/contact-us/

The Problems and Possibilities for Using Electronic Bills of Lading as Collateral [Note]

LL.M. NoteThis material published in Arizona Journal of International and Comparative Law is made available by the James E. Rogers College of Law, the Daniel F. Cracchiolo Law Library, and the University of Arizona Libraries. If you have questions, please contact the AJICL Editorial Board at http://arizonajournal.org/contact-us/

Toward Decentralized Commercial Law For Digital Assets

Technology affects various facets of the society and law. It has been tightly coupled in a symbiotic relationship with commercial law, including the Uniform Commercial Code (U.C.C.). While the conceptual framework of the U.C.C. and its realist ethos has fostered innovation since the 1950s, recent technological advances pose new challenges. In particular, digital assets traded in decentralized blockchain systems promise to engender a wide array of applications, prompting new business practices. A number of efforts have been recently undertaken to address the fundamental challenges to established legal concepts posed by these technological advances. All these efforts march forward grappling with a similar set of substantive issues, including what actions should the law recognize for a transferee to acquire a digital asset, such as Bitcoin. This article identifies the appropriate form in which commercial law should be expressed, including rules and standards. It identifies decentralized legislative solutions embedded in the U.C.C., analyzes how they have supported the growth of systems for the holding and transfers of various types of electronic records, and then applies the relevant solutions to particular issues concerning the use of digital assets, defined as controllable electronic records, in commercial transactions. Decentralization of systems pits centralized commercial law in the form of bright-line and mandatory rules against decentralized solutions of party autonomy, standards, and system rules that enable parties to tailor the law to their needs. The article argues that rules in the form of principled norms should govern the legal effect of transfers on third-party claims, particularly non-participants in systems. It isolates a particular type of a standard that it labels a “technology standard” which enables the system design to concretize the standard ex ante. Technology standards are suitable to establish when and how a person acquires rights to a digital asset. The highest form of decentralized legislative solutions in the form of system rules would be appropriate only for central bank digital currencies that have the characteristics of the systematically important institutions. This article argues that decentralization of commercial law does not undercut one of the primary aims of the U.C.C., which is to make the law uniform, and enables evolution of the relevant regulatory rules

Toward Decentralized Commercial Law For Digital Assets

Technology affects various facets of the society and law. It has been tightly coupled in a symbiotic relationship with commercial law, including the Uniform Commercial Code (U.C.C.). While the conceptual framework of the U.C.C. and its realist ethos has fostered innovation since the 1950s, recent technological advances pose new challenges. In particular, digital assets traded in decentralized blockchain systems promise to engender a wide array of applications, prompting new business practices. A number of efforts have been recently undertaken to address the fundamental challenges to established legal concepts posed by these technological advances. All these efforts march forward grappling with a similar set of substantive issues, including what actions should the law recognize for a transferee to acquire a digital asset, such as Bitcoin. This article identifies the appropriate form in which commercial law should be expressed, including rules and standards. It identifies decentralized legislative solutions embedded in the U.C.C., analyzes how they have supported the growth of systems for the holding and transfers of various types of electronic records, and then applies the relevant solutions to particular issues concerning the use of digital assets, defined as controllable electronic records, in commercial transactions. Decentralization of systems pits centralized commercial law in the form of bright-line and mandatory rules against decentralized solutions of party autonomy, standards, and system rules that enable parties to tailor the law to their needs. The article argues that rules in the form of principled norms should govern the legal effect of transfers on third-party claims, particularly non-participants in systems. It isolates a particular type of a standard that it labels a “technology standard” which enables the system design to concretize the standard ex ante. Technology standards are suitable to establish when and how a person acquires rights to a digital asset. The highest form of decentralized legislative solutions in the form of system rules would be appropriate only for central bank digital currencies that have the characteristics of the systematically important institutions. This article argues that decentralization of commercial law does not undercut one of the primary aims of the U.C.C., which is to make the law uniform, and enables evolution of the relevant regulatory rules