This article first explores how the prudential regulatory framework may be drastically changed as a result of the adoption of regtech and suptech innovations. The adoption of a shared data architecture, whereby the regulator is provided with seamless access to the accounts of regulated firms, may result in the development of a centralized approach to regulatory modelling, thus bypassing the existing partition between internal models and standardized approaches. Secondly, this article discusses how, thanks to the adoption of advanced predictive analytics, non-bank fintech lenders can gain insights into borrowers’ creditworthiness irrespective of banks’ control over traditional sources of information for credit scoring. This, though, may give rise to a new type of strategic gaming, this time by borrowers keen to maximize their chances of being granted a loan. In any case, preventing banks from adopting these new methods for the purpose of regulatory modelling might weaken their competitiveness. Thirdly, this article explores whether the transition to a centralized approach for credit risk management would conflate the distinction between microprudential and macroprudential interventions, in particular with respect to the countercyclical macroprudential policy. Finally, the article argues that non-bank (fintech) firms could be persuaded to coalesce behind endorsement of the new regulatory shared data platform in return for the support from the central bank. In this way, the regulatory perimeter could be extended in order to steer the adoption of financial innovations in a manner that benefits society overall.
{"title":"The Disruption of the Prudential Regulatory Framework","authors":"P. Siciliani","doi":"10.1093/jfr/fjz009","DOIUrl":"https://doi.org/10.1093/jfr/fjz009","url":null,"abstract":"\u0000 This article first explores how the prudential regulatory framework may be drastically changed as a result of the adoption of regtech and suptech innovations. The adoption of a shared data architecture, whereby the regulator is provided with seamless access to the accounts of regulated firms, may result in the development of a centralized approach to regulatory modelling, thus bypassing the existing partition between internal models and standardized approaches. Secondly, this article discusses how, thanks to the adoption of advanced predictive analytics, non-bank fintech lenders can gain insights into borrowers’ creditworthiness irrespective of banks’ control over traditional sources of information for credit scoring. This, though, may give rise to a new type of strategic gaming, this time by borrowers keen to maximize their chances of being granted a loan. In any case, preventing banks from adopting these new methods for the purpose of regulatory modelling might weaken their competitiveness. Thirdly, this article explores whether the transition to a centralized approach for credit risk management would conflate the distinction between microprudential and macroprudential interventions, in particular with respect to the countercyclical macroprudential policy. Finally, the article argues that non-bank (fintech) firms could be persuaded to coalesce behind endorsement of the new regulatory shared data platform in return for the support from the central bank. In this way, the regulatory perimeter could be extended in order to steer the adoption of financial innovations in a manner that benefits society overall.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2019-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/jfr/fjz009","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45936464","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}
European demographic structure and age composition are currently in a state of flux—life expectancy has increased, fertility rates have dropped, and baby-boomers have reached retirement age. The implications of these changes, coupled with the fragmented market for personal pension products throughout the EU are vast and call for close scrutiny of the relationship between financial and pension markets. This article examines the current regulatory efforts aimed at creating a Pan-European Personal Pension Product (PEPP). In doing so, it pursues two primary objectives: firstly, it seeks to explain the relevance of a European harmonized pension product to the overall concept of the single market; and secondly, it aims to explore the looming regulatory challenges stemming from the portability of social and pension rights. This is done by elaborating upon established law and economics scholarship on capital markets, including the Legal Theory of Finance developed by Katharina Pistor. By assessing the costs faced by prospective pensioners against the benefits of legislative harmonization (and other policy-related alternatives), from both a normative perspective as well as a positive one, this article attempts to make a case for an effective and sustainable governance response. The article ultimately seeks to provide a well-balanced, albeit modern outlook to the regulatory endeavours that have more recently been made applicable to the EU personal pension market in virtue of the creation of the PEPP and the wide-ranging effects of such reforms on law, finance, and society.
{"title":"The EU’s Regulatory Commitment to a European Harmonized Pension Product (PEPP): The Portability of Pension Rights vis-à-vis the Free Movement of Capital","authors":"Kyra Borg, Andrea Minto, H. V. Meerten","doi":"10.1093/JFR/FJZ005","DOIUrl":"https://doi.org/10.1093/JFR/FJZ005","url":null,"abstract":"\u0000 European demographic structure and age composition are currently in a state of flux—life expectancy has increased, fertility rates have dropped, and baby-boomers have reached retirement age. The implications of these changes, coupled with the fragmented market for personal pension products throughout the EU are vast and call for close scrutiny of the relationship between financial and pension markets.\u0000 This article examines the current regulatory efforts aimed at creating a Pan-European Personal Pension Product (PEPP). In doing so, it pursues two primary objectives: firstly, it seeks to explain the relevance of a European harmonized pension product to the overall concept of the single market; and secondly, it aims to explore the looming regulatory challenges stemming from the portability of social and pension rights. This is done by elaborating upon established law and economics scholarship on capital markets, including the Legal Theory of Finance developed by Katharina Pistor. By assessing the costs faced by prospective pensioners against the benefits of legislative harmonization (and other policy-related alternatives), from both a normative perspective as well as a positive one, this article attempts to make a case for an effective and sustainable governance response.\u0000 The article ultimately seeks to provide a well-balanced, albeit modern outlook to the regulatory endeavours that have more recently been made applicable to the EU personal pension market in virtue of the creation of the PEPP and the wide-ranging effects of such reforms on law, finance, and society.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2019-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJZ005","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44101593","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 analyses the impact of asset and activity diversification on the stability of major financial institutions. Diversification is typically viewed as a positive element in risk management. However, examining recent examples concerning diversified multinational financial institutions and a theoretical model of failure risk facing them, this article demonstrates that under certain conditions, diversification can actually increase systemic risk. Financial conglomerates can be ‘too big to manage’, they can become too similar to each other and susceptible to coordinated failure, and, most importantly, catastrophic losses in one part of the firm can overwhelm the whole firm. Based on this finding, this article proposes a number of mitigation measures to limit intra-firm spillover and to make the resolution of troubled financial institutions smoother.
{"title":"The Myth of Diversification: The Destabilizing Impact of Diversification on Financial Institutions","authors":"Kwon-Yong Jin","doi":"10.1093/jfr/fjz007","DOIUrl":"https://doi.org/10.1093/jfr/fjz007","url":null,"abstract":"\u0000 This article analyses the impact of asset and activity diversification on the stability of major financial institutions. Diversification is typically viewed as a positive element in risk management. However, examining recent examples concerning diversified multinational financial institutions and a theoretical model of failure risk facing them, this article demonstrates that under certain conditions, diversification can actually increase systemic risk. Financial conglomerates can be ‘too big to manage’, they can become too similar to each other and susceptible to coordinated failure, and, most importantly, catastrophic losses in one part of the firm can overwhelm the whole firm. Based on this finding, this article proposes a number of mitigation measures to limit intra-firm spillover and to make the resolution of troubled financial institutions smoother.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/jfr/fjz007","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42056785","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}
In the macro-prudential literature, ‘inaction bias’ describes the supposed tendency of macro-prudential actors to favour inaction over action when considering the use of macro-prudential tools. While inaction bias is a topic of much interest in macro-prudential policy circles, it has received scant attention from legal scholarship. The aim of this article is to contribute to filling this gap by studying inaction in an EU macro-prudential context and by evaluating the institutional arrangements that were put in place in order to address so-called inaction bias. Several actors at the EU level have a role to play in macro-prudential supervision, especially the European Systemic Risk Board and the European Central Bank (ECB). This paper will assess their capabilities and their capacity to turn these into actions. The role of the ECB will be of particular interest since it was vested with real powers to address possible inaction bias among states participating in the Banking Union. Among other things, I will examine whether the ECB’s macro-prudential powers are the cure to the problems that are said to underpin inaction bias at the national level.
{"title":"Inaction in Macro-prudential Supervision: Assessing the EU’s Response","authors":"Pierre Schammo","doi":"10.1093/JFR/FJZ001","DOIUrl":"https://doi.org/10.1093/JFR/FJZ001","url":null,"abstract":"\u0000 In the macro-prudential literature, ‘inaction bias’ describes the supposed tendency of macro-prudential actors to favour inaction over action when considering the use of macro-prudential tools. While inaction bias is a topic of much interest in macro-prudential policy circles, it has received scant attention from legal scholarship. The aim of this article is to contribute to filling this gap by studying inaction in an EU macro-prudential context and by evaluating the institutional arrangements that were put in place in order to address so-called inaction bias. Several actors at the EU level have a role to play in macro-prudential supervision, especially the European Systemic Risk Board and the European Central Bank (ECB). This paper will assess their capabilities and their capacity to turn these into actions. The role of the ECB will be of particular interest since it was vested with real powers to address possible inaction bias among states participating in the Banking Union. Among other things, I will examine whether the ECB’s macro-prudential powers are the cure to the problems that are said to underpin inaction bias at the national level.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"1 1","pages":""},"PeriodicalIF":2.6,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJZ001","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"61718860","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}
Cryptocurrencies are expected to have a significant impact on banking, finance, and monetary systems. Due to the uncertainty as to the possible future trajectories of the evolving cryptocurrency ecosystem, governments have taken a relatively hands-off approach to regulating such currencies. This approach may be justified within the theoretical information-economics framework of this paper, which draws parallels between the information economics of money and quasi-money creation within the current central banking, commercial banking, and shadow banking systems with that of the cryptocurrency ecosystem. In particular, drawing lessons from the literature on the role of information in creating ‘safe assets’, in this paper the authors find that by building on symmetric (common) knowledge as to the inner workings of the Bitcoin Blockchain—though in a different way—bitcoin possesses a degree of endogenous information insensitivity typical of safe assets. This endogenous information insensitivity could support bitcoin’s promise of maturing into a viable store of value and a niche medium of exchange. This finding should not be overlooked in the policy discussions for potential future regulatory interventions in the cryptocurrency ecosystem.
{"title":"Ignorance, Debt, and Cryptocurrencies: The Old and the New in the Law and Economics of Concurrent Currencies*","authors":"Hossein Nabilou, André Prüm","doi":"10.1093/jfr/fjz002","DOIUrl":"https://doi.org/10.1093/jfr/fjz002","url":null,"abstract":"\u0000 Cryptocurrencies are expected to have a significant impact on banking, finance, and monetary systems. Due to the uncertainty as to the possible future trajectories of the evolving cryptocurrency ecosystem, governments have taken a relatively hands-off approach to regulating such currencies. This approach may be justified within the theoretical information-economics framework of this paper, which draws parallels between the information economics of money and quasi-money creation within the current central banking, commercial banking, and shadow banking systems with that of the cryptocurrency ecosystem. In particular, drawing lessons from the literature on the role of information in creating ‘safe assets’, in this paper the authors find that by building on symmetric (common) knowledge as to the inner workings of the Bitcoin Blockchain—though in a different way—bitcoin possesses a degree of endogenous information insensitivity typical of safe assets. This endogenous information insensitivity could support bitcoin’s promise of maturing into a viable store of value and a niche medium of exchange. This finding should not be overlooked in the policy discussions for potential future regulatory interventions in the cryptocurrency ecosystem.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/jfr/fjz002","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45030409","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}
The author contends that, for major banks with price-to-book ratios less than one, stress tests based on market values should be run and published by regulators alongside existing stress test results.
{"title":"The Case for Market-Based Stress Tests","authors":"J. Vickers","doi":"10.1093/jfr/fjz008","DOIUrl":"https://doi.org/10.1093/jfr/fjz008","url":null,"abstract":"\u0000 The author contends that, for major banks with price-to-book ratios less than one, stress tests based on market values should be run and published by regulators alongside existing stress test results.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":"1 1","pages":""},"PeriodicalIF":2.6,"publicationDate":"2018-10-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/jfr/fjz008","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41477168","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}
The author examines a controversy over the methods used by federal agencies to enforce fair-lending laws. Some hold that investigators should use primarily qualitative reviews of documents in loan files in their investigations. Others hold that the qualitative methodology of file reviews is inadequate and needs to be supplemented or replaced by quantitative statistical methods. The author argues that the methods in the federal Interagency Fair Lending Examination Procedure should be revised to use a combination of qualitative and quantitative methods in a better way so that they complement each other. Investigations should rely primarily on quantitative methods to investigate institutional discrimination, but use the qualitative methods of file reviews in the investigation of individual agents for their discriminatory decisions.
{"title":"Should Fair-lending Investigators Better Mix Qualitative and Quantitative Methods?","authors":"C. Cosans","doi":"10.1093/JFR/FJY008","DOIUrl":"https://doi.org/10.1093/JFR/FJY008","url":null,"abstract":"\u0000 The author examines a controversy over the methods used by federal agencies to enforce fair-lending laws. Some hold that investigators should use primarily qualitative reviews of documents in loan files in their investigations. Others hold that the qualitative methodology of file reviews is inadequate and needs to be supplemented or replaced by quantitative statistical methods. The author argues that the methods in the federal Interagency Fair Lending Examination Procedure should be revised to use a combination of qualitative and quantitative methods in a better way so that they complement each other. Investigations should rely primarily on quantitative methods to investigate institutional discrimination, but use the qualitative methods of file reviews in the investigation of individual agents for their discriminatory decisions.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2018-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJY008","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49394209","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":"The Financial Stability Aspects of the EU-wide Stress Test","authors":"Andrea Ebner","doi":"10.1093/JFR/FJY009","DOIUrl":"https://doi.org/10.1093/JFR/FJY009","url":null,"abstract":"","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2018-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJY009","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46106118","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 analyses the competition impact of the implementation of two recent regulatory reforms aimed at boosting competition in retail banking by reducing consumer search and switching costs and empowering different business models whereby non-bank operators are able to compete with banks with respect to specific activities such as the provision of payment services. The article investigates how banks may react strategically in order to fend off the resulting competition threats which could undermine retail banks’ reliance on the supply of sight retail deposits as their main source of funding. It also explores how financial regulators, in particular prudential authorities should respond, mindful of the risk for unintended consequences.
{"title":"The Disruption of Retail Banking: A Competition Analysis of the Implications for Financial Stability and Monetary Policy","authors":"P. Siciliani","doi":"10.1093/JFR/FJY006","DOIUrl":"https://doi.org/10.1093/JFR/FJY006","url":null,"abstract":"This article analyses the competition impact of the implementation of two recent regulatory reforms aimed at boosting competition in retail banking by reducing consumer search and switching costs and empowering different business models whereby non-bank operators are able to compete with banks with respect to specific activities such as the provision of payment services. The article investigates how banks may react strategically in order to fend off the resulting competition threats which could undermine retail banks’ reliance on the supply of sight retail deposits as their main source of funding. It also explores how financial regulators, in particular prudential authorities should respond, mindful of the risk for unintended consequences.","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2018-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJY006","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43045637","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":"Third-Country Equivalence and Access to the EU Financial Markets Including in Case of Brexit","authors":"E. Wymeersch","doi":"10.1093/JFR/FJY005","DOIUrl":"https://doi.org/10.1093/JFR/FJY005","url":null,"abstract":"","PeriodicalId":42830,"journal":{"name":"Journal of Financial Regulation","volume":" ","pages":""},"PeriodicalIF":2.6,"publicationDate":"2018-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1093/JFR/FJY005","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43830722","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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