Abstract Modern data and information technologies are having a profound impact on financial services and opening new frontiers in regulation. This article explores the opportunities for using modern tools of data access and sharing to embed regulatory objectives within the management and decision-making processes of financial firms. This can enhance oversight of prudential and conduct risks as well as substantially lowering compliance costs. It can also help address the information imbalances that limit the effectiveness of older approaches in which the firm is a ‘black box’ that can only be externally supervised. The central challenge is establishing an appropriate governance of data in regulated firms to ensure the achievement of both regulatory and business objectives. Such an approach can be viewed as a further and more radical development of established ‘new governance’ techniques of financial regulation.
{"title":"Data Access Technologies and the ‘New Governance’ Techniques of Financial Regulation","authors":"David McNulty, Andrea Miglionico, Alistair Milne","doi":"10.1093/jfr/fjad008","DOIUrl":"https://doi.org/10.1093/jfr/fjad008","url":null,"abstract":"Abstract Modern data and information technologies are having a profound impact on financial services and opening new frontiers in regulation. This article explores the opportunities for using modern tools of data access and sharing to embed regulatory objectives within the management and decision-making processes of financial firms. This can enhance oversight of prudential and conduct risks as well as substantially lowering compliance costs. It can also help address the information imbalances that limit the effectiveness of older approaches in which the firm is a ‘black box’ that can only be externally supervised. The central challenge is establishing an appropriate governance of data in regulated firms to ensure the achievement of both regulatory and business objectives. Such an approach can be viewed as a further and more radical development of established ‘new governance’ techniques of financial regulation.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136354411","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Like similar bodies in several other countries, the Systemic Risk Council in Denmark was established in response to the global financial crisis. This article first outlines the Council’s design and performance, and then discusses the need for changes to the Council’s remit, governance, powers, and communication with the public. While the design of systemic risk councils varies a lot across countries, and without a consensus on what constitutes an optimal design of a macroprudential policy framework, the Danish experience contributes to the literature on what works, and what does not, in relation to managing systemic risks.
{"title":"The Systemic Risk Council in Denmark: Assessing Strengths and Weaknesses","authors":"S. Jensen, Thomas Sangill","doi":"10.1093/jfr/fjad006","DOIUrl":"https://doi.org/10.1093/jfr/fjad006","url":null,"abstract":"\u0000 Like similar bodies in several other countries, the Systemic Risk Council in Denmark was established in response to the global financial crisis. This article first outlines the Council’s design and performance, and then discusses the need for changes to the Council’s remit, governance, powers, and communication with the public. While the design of systemic risk councils varies a lot across countries, and without a consensus on what constitutes an optimal design of a macroprudential policy framework, the Danish experience contributes to the literature on what works, and what does not, in relation to managing systemic risks.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"1 1","pages":""},"PeriodicalIF":2.6,"publicationDate":"2023-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46154228","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article explores the use of artificial intelligence software to create financial recommendations. It seeks to define the impacts and outline the benefits of using ChatGPT software in the highly regulated Australian financial sector. ChatGPT was asked to create a financial recommendation, which was evaluated against the relevant regulations and the recommendations of existing professionals and market contributors. The data generated was analysed using Qualtrics analysis techniques. The findings suggest that ChatGPT significantly reduces the time required to carry out creation, input, and editing services for simple financial advice recommendations. However, ChatGPT fails to operate effectively with complex financial advice and requires professional guidance to ensure regulatory adherence. In future, it may be possible to develop ChatGPT as a complementary tool to decrease the time and cost required to create financial recommendations.
{"title":"Artificial Intelligence Authoring Financial Recommendations: Comparative Australian Evidence","authors":"Benjamin R. Neilson","doi":"10.1093/jfr/fjad004","DOIUrl":"https://doi.org/10.1093/jfr/fjad004","url":null,"abstract":"\u0000 This article explores the use of artificial intelligence software to create financial recommendations. It seeks to define the impacts and outline the benefits of using ChatGPT software in the highly regulated Australian financial sector. ChatGPT was asked to create a financial recommendation, which was evaluated against the relevant regulations and the recommendations of existing professionals and market contributors. The data generated was analysed using Qualtrics analysis techniques. The findings suggest that ChatGPT significantly reduces the time required to carry out creation, input, and editing services for simple financial advice recommendations. However, ChatGPT fails to operate effectively with complex financial advice and requires professional guidance to ensure regulatory adherence. In future, it may be possible to develop ChatGPT as a complementary tool to decrease the time and cost required to create financial recommendations.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2023-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46827646","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Correction to: Badges of Misconduct: Consumer Rules to Avoid Abusive Financial Advisers","authors":"","doi":"10.1093/jfr/fjad005","DOIUrl":"https://doi.org/10.1093/jfr/fjad005","url":null,"abstract":"","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"111 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136186234","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
ABSTRACT There is growing presumption that central banks have a significant role to play in addressing environmental challenges, especially climate change. This article explains, on the basis of both theoretical and empirical evidence, that attempting to use existing central bank tools and powers to tackle climate change will prove inadequate to tackle the issue(s) at hand. From a positivist perspective at least—and contrary to the claims made in the literature—the tools that central banks possess are insufficient to make any meaningful contribution to emissions reductions and prevent global heating. This is because many of the proposals made by academics, regulators, and legislators to expand the central bank toolkit to equip banks to tackle climate change suffer from deep conceptual and practical drawbacks when applied in this domain. These critical weaknesses mean that the policy prescriptions that flow from them will be of limited impact; this would likely be the case even if central banks were to obviate their mandates more explicitly and attempt to use such tools to address climate change directly. In so doing, they waste valuable political and economic capital that might be usefully deployed in tackling climate change. The obstacles to using these tools are not political or legal; they are inherent in their operation.
{"title":"Central Banks and Climate Change: Mission Impossible?","authors":"Jay Cullen","doi":"10.1093/jfr/fjad003","DOIUrl":"https://doi.org/10.1093/jfr/fjad003","url":null,"abstract":"ABSTRACT There is growing presumption that central banks have a significant role to play in addressing environmental challenges, especially climate change. This article explains, on the basis of both theoretical and empirical evidence, that attempting to use existing central bank tools and powers to tackle climate change will prove inadequate to tackle the issue(s) at hand. From a positivist perspective at least—and contrary to the claims made in the literature—the tools that central banks possess are insufficient to make any meaningful contribution to emissions reductions and prevent global heating. This is because many of the proposals made by academics, regulators, and legislators to expand the central bank toolkit to equip banks to tackle climate change suffer from deep conceptual and practical drawbacks when applied in this domain. These critical weaknesses mean that the policy prescriptions that flow from them will be of limited impact; this would likely be the case even if central banks were to obviate their mandates more explicitly and attempt to use such tools to address climate change directly. In so doing, they waste valuable political and economic capital that might be usefully deployed in tackling climate change. The obstacles to using these tools are not political or legal; they are inherent in their operation.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"589 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-03-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135628901","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Stefan Gissler, Borghan Narajabad, Daniel K Tarullo
Abstract The Federal Home Loan Banks (FHLBs) are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide an incentive to take advantage of the considerable public privileges from which they benefit—including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed by Fannie Mae and Freddie Mac before the Global Financial Crisis. This article examines past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.
{"title":"Federal Home Loan Banks and Financial Stability","authors":"Stefan Gissler, Borghan Narajabad, Daniel K Tarullo","doi":"10.1093/jfr/fjad002","DOIUrl":"https://doi.org/10.1093/jfr/fjad002","url":null,"abstract":"Abstract The Federal Home Loan Banks (FHLBs) are the less well-known siblings of Fannie Mae and Freddie Mac. Since these government-sponsored enterprises were created in 1932, changes in housing finance markets have rendered largely irrelevant their original purpose of increasing the availability of mortgages. Yet the level and scope of their activities have increased dramatically in recent decades. These activities have at times both exacerbated risks to financial stability and obstructed the missions of federal financial regulators. Behind these undesirable outcomes lies the public/private hybrid nature of the FHLBs. The private ownership and control of the FHLBs provide an incentive to take advantage of the considerable public privileges from which they benefit—including an explicit line of credit from the United States Government and an implied guarantee of all their debt similar to that enjoyed by Fannie Mae and Freddie Mac before the Global Financial Crisis. This article examines past incidence and future potential for the FHLBs to amplify financial stability risks. It offers a framework for regulatory reform by the Federal Housing Finance Agency to contain these risks and avoid harmful interference with the activities of other federal regulators.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-03-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134964737","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract Using post-Brexit regulatory freedom to strengthen the financial sector has been seen as a priority for the UK government under the Conservative Party following the 2017 general election. The laying before Parliament of the Financial Services and Markets Bill (July 2022) marked the start of a multi-year process aiming to transform the regulatory framework. Adding a competitiveness and growth secondary objective to regulatory mandates was an important part of the reform agenda set out in the Bill. This article draws on theory (regulatory competition, regulatory procyclicality, and regulatory design) and recent history (post 2008-crisis regulatory reform) to question the wisdom of reinstating international competitiveness in regulatory mandates in this way. The key concern is that this change risks opening the door to an excessively deregulatory agenda and the undermining of regulatory independence. That the new competitiveness and growth objective will be used to advance deregulatory agenda was already becoming evident during 2022 as the UK debated the adaptation and evolution of EU-derived prudential and capital market laws to suit its new situation. Since the competitiveness and growth objective bandwagon may have become unstoppable, the article directs attention to the role of accountability in protecting regulatory independence. Regulators need to be able to resist pressure to lower standards unduly, and an effective system of accountability can support them in doing so.
{"title":"International Competitiveness and Financial Regulators’ Mandates: Coming Around Again in the UK","authors":"Eilís Ferran","doi":"10.1093/jfr/fjad001","DOIUrl":"https://doi.org/10.1093/jfr/fjad001","url":null,"abstract":"Abstract Using post-Brexit regulatory freedom to strengthen the financial sector has been seen as a priority for the UK government under the Conservative Party following the 2017 general election. The laying before Parliament of the Financial Services and Markets Bill (July 2022) marked the start of a multi-year process aiming to transform the regulatory framework. Adding a competitiveness and growth secondary objective to regulatory mandates was an important part of the reform agenda set out in the Bill. This article draws on theory (regulatory competition, regulatory procyclicality, and regulatory design) and recent history (post 2008-crisis regulatory reform) to question the wisdom of reinstating international competitiveness in regulatory mandates in this way. The key concern is that this change risks opening the door to an excessively deregulatory agenda and the undermining of regulatory independence. That the new competitiveness and growth objective will be used to advance deregulatory agenda was already becoming evident during 2022 as the UK debated the adaptation and evolution of EU-derived prudential and capital market laws to suit its new situation. Since the competitiveness and growth objective bandwagon may have become unstoppable, the article directs attention to the role of accountability in protecting regulatory independence. Regulators need to be able to resist pressure to lower standards unduly, and an effective system of accountability can support them in doing so.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-03-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136275123","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jeffrey Camarda, S. Lee, Piet de Jong, Jerusha Lee
The financial advisory industry in the USA lacks professional standardization/regulation. There are few guideposts to assess adviser quality, and risks to consumer welfare abound. Some 91% of investment advisers operate on conflicted sales commission licences, although many market themselves as fiduciaries. Using an adviser misconduct scoring framework we report specific misconduct ratings for each of the 625,980 Financial Industry Regulatory Authority (FINRA) advisers, finding elevated misconduct for Certified Financial Planner (CFP®) professionals and commission/fiduciary licensees. For Chartered Financial Analyst (CFA®) professionals, we found the opposite. We propose a unique scoring system to aid consumers in flagging problematic advisers. We also offer simple regulatory policy recommendations, which could enable stronger consumer protection at minimal cost or bureaucratic burden.
{"title":"Badges of Misconduct: Consumer Rules to Avoid Abusive Financial Advisers","authors":"Jeffrey Camarda, S. Lee, Piet de Jong, Jerusha Lee","doi":"10.1093/jfr/fjac012","DOIUrl":"https://doi.org/10.1093/jfr/fjac012","url":null,"abstract":"The financial advisory industry in the USA lacks professional standardization/regulation. There are few guideposts to assess adviser quality, and risks to consumer welfare abound. Some 91% of investment advisers operate on conflicted sales commission licences, although many market themselves as fiduciaries. Using an adviser misconduct scoring framework we report specific misconduct ratings for each of the 625,980 Financial Industry Regulatory Authority (FINRA) advisers, finding elevated misconduct for Certified Financial Planner (CFP®) professionals and commission/fiduciary licensees. For Chartered Financial Analyst (CFA®) professionals, we found the opposite. We propose a unique scoring system to aid consumers in flagging problematic advisers. We also offer simple regulatory policy recommendations, which could enable stronger consumer protection at minimal cost or bureaucratic burden.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2023-02-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46951327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article considers the effects of legal protections of creditors within the macro-financial theory of leverage cycles developed by John Geanakoplos. The theory posits that leverage is procyclical. I propose a theoretical framework, ‘Law and Macro-Finance’, comprising two main clams: (1) the strength of legal protections of creditors has an impact on the quantum of debt creditors are willing to underwrite not just the interest rate on that debt and (2) that quantum varies across the cycle in a procyclical fashion. In a boom, when asset prices are higher, leverage decreases, creating incentives for creditors to underwrite additional leverage secured on those assets without increasing the interest rate. The stronger the legal protections of creditors, the stronger the incentives to underwrite additional leverage based solely on the increasing value of the collateral. By creating such incentives, strong legal protections of creditors, associated with claims designated in the law as ‘bankruptcy remote’, will accelerate the boom and increase the vulnerability of the economy to shocks. On the normative side, this article proposes a countercyclical design of strong legal protections of creditors. The design makes the availability of such protections, typically achieved by reliance on the legal doctrine of ‘true sales’, conditioned on the adequacy of the price paid in the transaction. The adequacy, in turn, is determined in reference to the applicable schedule of collateral haircuts determined by the central bank.
{"title":"A Theoretical Framework for Law and Macro-Finance","authors":"M Konrad Borowicz","doi":"10.1093/jfr/fjac011","DOIUrl":"https://doi.org/10.1093/jfr/fjac011","url":null,"abstract":"This article considers the effects of legal protections of creditors within the macro-financial theory of leverage cycles developed by John Geanakoplos. The theory posits that leverage is procyclical. I propose a theoretical framework, ‘Law and Macro-Finance’, comprising two main clams: (1) the strength of legal protections of creditors has an impact on the quantum of debt creditors are willing to underwrite not just the interest rate on that debt and (2) that quantum varies across the cycle in a procyclical fashion. In a boom, when asset prices are higher, leverage decreases, creating incentives for creditors to underwrite additional leverage secured on those assets without increasing the interest rate. The stronger the legal protections of creditors, the stronger the incentives to underwrite additional leverage based solely on the increasing value of the collateral. By creating such incentives, strong legal protections of creditors, associated with claims designated in the law as ‘bankruptcy remote’, will accelerate the boom and increase the vulnerability of the economy to shocks. On the normative side, this article proposes a countercyclical design of strong legal protections of creditors. The design makes the availability of such protections, typically achieved by reliance on the legal doctrine of ‘true sales’, conditioned on the adequacy of the price paid in the transaction. The adequacy, in turn, is determined in reference to the applicable schedule of collateral haircuts determined by the central bank.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"215 ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2022-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138505818","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.
{"title":"Walking a Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy","authors":"Dimitri G. Demekas, P. Grippa","doi":"10.1093/jfr/fjac010","DOIUrl":"https://doi.org/10.1093/jfr/fjac010","url":null,"abstract":"\u0000 As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2022-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42707965","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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