Bounds in Bank Regulation | Yale Law Journal

Bounds in Bank Regulation | Yale Law Journal
Volume
125
VIEW MASTHEAD
Essay
Bounds in Bank Regulation
9 November 2015
Sung Eun (Summer) Kim
Securities Law
Administrative Law
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Introduction
In his recent essay,
Bounded
Institutions
Yair Listokin examines bounded and
unbounded structures as two alternative designs for principals to delegate
regulatory authority to their agents.
Bounds refer to numerical or quantifiable limitations that are set by the
principal on some dimension of the agent’s decision-making process, and include
caps, quotas or grading curves.
Listokin shows that bounds can be
used to reach ideal regulatory outcomes even in cases where the principal is
uninformed and the agent is biased.
In this Response, I extend the logic and intuition of
Listokin’s bounded institutions to banking, an area where information gaps and
biases are pervasive yet bounded structures are not prevalent. For instance, in
the debate about the right size of financial institutions, while there is
consensus that a certain number of financial institutions have become too big
(and thus too big to fail), there is much that remains to be agreed regarding
the right size of such institutions and how that ideal should be reached.
Likewise, while there is broad recognition that there are accuracy and
accountability issues in the ratings process of financial institutions, how
this regulatory ratings process can be improved and how progress can be
measured are open questions that are being debated.
I suggest here that bounds—particularly their numerical
and quantifiable features, like quotas and curves—can offer a concrete
solution to these and other regulatory puzzles in banking. I make the argument
that more bounds can and should be used in bank regulation: first, by showing
that the banking environment satisfies the theoretical conditions for bounded
structures, and second, by examining the ways in which the special features of
bounds can help solve the urgent challenges in bank regulation.
I. how do
bounded institutions
work in banking?
This Part provides the basic framework. Who are the relevant
actors? In Listokin’s model, there is a superior body (the principal, or
), a subordinate body (the agent, or
), and the regulated subjects (or
) who are affected by the principal and
agent’s decisions.
The principal relies on the agent to observe and allocate benefits to the
subjects according to the quality of the subjects. In banking, Congress enacted
the National Bank Act and the National Currency Act in 1863, the former to
create a new class of national banks and the latter to form the Office of the
Comptroller of the Currency (OCC), which was charged with the chartering and
supervision of these national banks.
Throughout this Response, I will refer to Congress as the principal, the OCC as
its agent, and the national banks supervised by the OCC as the subjects.
The remainder of this Part examines how well the bank
regulatory environment fits with the conditions Listokin identifies as ideal
for the use of bounded structures.
Listokin
recommends the use of bounds when: (1) there is a large number of subjects, (2)
there is little variation among subject quality, (3) the agent is prone to bias
and error, and (4) there are limitations to the practicability of rules.
A. Large Number of Subjects
By the end of 2014, the OCC oversaw a total of 1,663
financial institutions, which included 39 large banks, 36 mid-size banks, 1,077
community banks, 49 federal branches, and 462 federal savings associations.
Although the total number of
regulated institutions has fluctuated from year to year, the total assets of
the subjects that are regulated by the OCC have grown consistently over the
past ten years, as demonstrated in Table 1. This trend aligns with the overall
trend of growth throughout the financial sector, which has continuously
expanded over the past thirty years, whether expressed as the financial
sector’s share of gross domestic product (GDP), the quantity of financial
assets, employment, or average wages.
10
Table 1.
number and size of occ-regulated banks
11
B. Little Variation Among
Subjects
Non-financial firms can be created for any legal purpose and
take myriad forms. Banks, on the other hand, are limited by statute to one or
more of three core banking functions: receiving deposits, paying checks, or
lending money.
12
And even among financial firms, banks tend to be more homogenous. This
homogeneity is largely a result of regulatory design. Activity restrictions and
other limitations placed on national banks, together with federal preemption
rules meant to ensure uniformity, make it exceedingly difficult for banks to
operate in ways that depart too far from the norm.
13
C. Agents Prone to Bias
and Error
Bias and error have specific meanings in Listokin’s model.
Bias refers to the tendency of an agent to systematically place a higher or
lower value on a subject than the principal would perceive (if it had the
opportunity to directly observe the subject’s quality),
14
and error refers to when the agent allocates more or less to the subject than
the principal thinks the subject deserves.
15
Fads in science are one source of bias and error that Listokin discusses in his
application of bounded structures to the National Science Foundation (NSF),
which could be analogized to bubbles in finance.
16
Bubbles in finance arise when a particular asset is traded at a price
significantly above its intrinsic value, and are fueled by over-optimistic
perceptions of value (bias) of and the disproportionate allocations of
resources (error) to such asset class. For example, the housing bubble that was
pointed to as one of the fundamental causes of the 2007-2009 financial crisis
was created as a result of over-optimistic projections of value in the housing
sector, and related regulatory policies and market responses that
over-stimulated the mortgage and mortgage-backed securities markets.
17
Another source of bias in financial regulation are boundary
problems, which exist when regulatory boundaries are drawn according to
outdated notions of the risks, activities, and actors that they aim to
regulate.
18
While some boundary problems are inevitable because of the pace of financial
innovation and the intentional efforts of financial institutions to operate
outside of regulatory boundaries, others can be attributed to ill-fitting
regulatory design. For example, in my most recent work, I have described the ways
in which the traditional institution-based approach to financial regulation has
exacerbated regulatory biases and error (as defined by Listokin) in the
regulation of leveraged loans.
19
D. Limitations on Practicability
of Rules
Listokin explains that bounds are especially useful in
settings where it is difficult to devise rules to guide the agent.
20
Whether or not rule-based guides are feasible depend on the availability and
reliability of proxies.
21
While banking
is an area where rule-based policies are widely used, the reliability of the
proxies used to administer rule-based policies has come into question in the
aftermath of the recent financial crisis.
22
Numerous accounts of the financial crisis describe the ways in which proxies
such as the credit scores of borrowers, credit ratings of securitized financial
products, and regulatory assessments of the quality of capital held by
eventually failed financial institutions grossly underrepresented the degree of
risk in our financial system.
23
It was such
misunderstandings of the magnitude of risk that catalyzed a crisis for which no
one was prepared.
24
More importantly, the key difference between rules and bounds
is that rules are indifferent to the allocation among subjects.
25
Under a rule-based system, so long as a subject satisfies the specified
conditions, its status and treatment are unaffected by the performance of its
peers. This feature of rules makes them less suitable for banking regulation in
this post-crisis period where there is renewed focus on interconnectedness
among institutions, and recognition that an understanding of where banks stand
in relation to one another is critically important to systemic risk regulation.
26
The foregoing analysis demonstrates that the banking
environment satisfies the four theoretical conditions identified by Listokin as
ideal for the application of bounds. Part II of this Response examines why
there are nonetheless so few bounds in banking, given their seeming fit, and
Part III goes on to explore two specific contexts where the promise of bounds
in banking could be realized.
II. why are there
so few bounds in banking?
If banking provides a theoretically ideal environment for
bounds, one might expect to see bounds being widely used in bank regulation.
However, much of bank regulation is presently rules-based.
27
Listokin explains that there are some areas where bounded structures are not
workable because of the idiosyncratic or unexpected nature of the regulated
subjects’ needs.
28
One such example is regulation that deals with large-scale and rare disasters
(such as catastrophic hurricanes) where the inability of bounds to flexibly
adapt to variations could actually lead to bad outcomes. Another is defense
spending, which is expensive and less predictable and where the transaction
costs of passing additional bills are high.
29
Should banking also be added to this short list of sectors that are
incompatible with bounds? In this Part, I explore some possible explanations
for the scarcity of bounds in banking but also refute the notion that such
explanations preclude the use of bounds in banking altogether.
A. Agent Independence
One structural feature of bank
regulation that could make implementing bounds more challenging is the fact
that the agencies that regulate financial institutions are independent
agencies.
30
The OCC is organized as an independent bureau of the U.S. Department of
Treasury, and does not receive any appropriations from Congress.
31
In 2014, about 97% of the OCC’s operations was funded by semiannual assessments
levied on national banks and federal savings associations, with the remainder
coming from the OCC’s investments and other income.
32
This structural feature of the OCC could limit the efficacy of bounds if it
means that the principal lacks the authority to constrain, including through
the use of bounds, its agent.
However, the independent and self-funded status of the OCC
does not mean that it is insulated from
any
congressional control. Congress could exercise control over and implement
bounds on the OCC by exercising its power to (i) amend the National Bank Act,
(ii) request evaluations, investigations, and audits via the Government Accountability
Office (GAO), and (iii) set the scope and standard of judicial review of agency
actions.
33
And Listokin makes clear that bounds encompass more than just presidential
oversight and congressional appropriations; they include other avenues of control
such as regulatory budgets, resource constraints, and even cost-benefit
analysis.
34
Cost-benefit analysis in particular has taken an expanded role in many areas of
financial regulation.
35
B. Type of Risk
Another characteristic of banking that could explain the
absence of bounds is the type of risks that pervade the banking sector. Bank
regulation, like hurricane regulation, also protects against infrequent and
destructive events. Carmen Reinhart and Kenneth Rogoff’s account of the past
eight hundred years of banking crises has confirmed the inevitability and
cyclicality of such large-scale crises.
36
But financial crises, unlike floods or earthquakes and other
force majeure
events, are human-made and
thus are theoretically preventable, or at least controllable. And much of bank
regulation is also about the ordinary course of banking, such as regulating
entry and exit, defining the scope of permissible activities, and the
supervision of the management and information systems used to monitor risk.
Recognizing that the nature of banking risks ranges from the extraordinary to
ordinary,
37
bounds could selectively be applied to the kinds of risks and decisions that
fluctuate less from year to year.
C. Information Gaps
Another possible explanation for why bounds are infrequently
used is the information asymmetry or gap between what is known by the principal
versus what is known by the agent with respect to the quality of the subjects.
38
As Listokin explains: “when the principal has more uncertainty regarding the distribution
of quality within the population, bounded institutions become less attractive
relative to unbounded institutions.”
39
In the context of banking, Roberta Romano has written about the challenges of
financial regulators who must regulate in the face of unavailability of key
information, a dynamically changing environment, and uncertainty.
40
Under such conditions, how can Congress intelligently set bounds to constrain
the OCC if it does not have any superior information with respect to the
quality of the regulated subjects?
While no crystal ball exists, records of past information and
the benefit of hindsight are available to Congress, and it is this history and
backlog of information that is needed to set and test bounds in bank
regulation. And to the extent there are gaps in Congress’s knowledge, the use
of bounds can be one way to actually force information from both the regulated
banks and bank regulators up to Congress so that it can set the proper bounds.
41
Furthermore, the information required to design bounds in bank regulation comes
from not only the agents and subject banks, but also from the debt and equity
markets (such as stock prices, trading volume, and default frequencies) that
have also been shown to be accurate predictors of bank failures and successes.
42
And the newly created Office of Financial Research (OFR) was formed
specifically for the purpose of gathering and disseminating information that
can be used as regulatory inputs in the design and implementation of bounds.
43
III. what might bounds look like in banking?
Comparing banking data and trends with Listokin’s model in
Part I suggests that banks could be fertile ground for the use of bounds. And
the discussion in Part II demonstrates that while barriers exist, they are not
insurmountable. This last Part offers a preliminary sketch of what bounds might
look like in banking regulation by offering two examples. The first is a
statutorily set quota on the chartering authority of the OCC and the second is
a statutorily set curve on the ratings of OCC-supervised banks. I first
describe the institutional setting for each, then discuss the strengths of
using bounds to address the acute problems in that particular setting. I will
also address possible counterarguments.
A. Bounds and the Issuance
of National Bank Charters
In this Section, I discuss the possible use of bounds in the
administration of one of the main levers of bank regulation: the OCC’s
licensing function. No entity in the United States can operate as a national
bank without an OCC-approved charter.
44
And unlike with corporate charters where the role of the secretary of state is
purely ministerial, the role of the regulator in reviewing and granting of
applications is much more than ministerial.
45
A positive or negative outcome of a charter application depends on whether the
OCC finds that there is a “reasonable chance that the bank will succeed and
that [it] will be operated in a safe and sound manner.”
46
If a charter application fails, the applicant may bring a judicial challenge, but
the standard of review in that case is the most deferential standard, which
asks whether the OCC’s decision was “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.”
47
This gatekeeping function of the OCC has created a
circularity problem in the later stages of the bank regulatory cycle: the
regulator who initially determines that a bank is likely to be successful at
the licensing stage also is tasked with the decision of whether or not to close
that same bank in the event of its distress. The dynamics of self-preservation
and blame avoidance may lead the regulator to become invested in the subjects’
success and display a tendency to “oversave” the banks it oversees.
48
In addition, the fact that almost all of the OCC’s budget comes from the
assessments and fees collected from supervised institutions raises a conflict
of interest in the chartering process by incentivizing the agent to grant more
charters than may otherwise be optimal (“overbank”).
Bounds could provide a solution to the problems of
overbanking and oversaving in the bank chartering process. A statutorily set
quota
49
could act as an upper bound on the presently quantitatively unfettered
discretion of the OCC in this decision to open banks. Congress would still rely
on the OCC’s expertise to determine whether an applicant deserves a charter (or
a receiver should be appointed), but could protect against any tendencies of
the agent to oversave or overbank by using bounds to limit the size and
crowdedness of the sector.
50
The strength of bounds such as the quota contemplated here is
that they force these discussions to happen ex ante and create a binding
mechanism that will not be eroded by the problems of circularity and conflict
of interests in bank regulation. However, implementing bounds does not come
without costs. A quota, if reached, will keep any and all entrants out,
regardless of their desert or merit. And if a prospective entrant is kept out
because there are no longer any seats left at the table, we might be worried
about two separate problems. Not only is this an unfair result for the
applicant, but it could also cause those who already have a seat at the
now-full table to become complacent. However, a quota is meant to force the
agent to face these kinds of difficult scenarios, which prioritize systemic
considerations above individual institutional concerns, and evaluate fairness
from the perspective of the entire banking sector and not just from that of the
prospective entrant or incumbent. Moreover, regulating entry is easier and less
costly than ex post intervention in a crowded, overheated banking market.
51
Furthermore, banking is a dynamic
industry, where there are multiple forced and natural departures, creating
frequent opportunities for new entrants to enter the banking industry by
assuming a closed bank’s deposits.
52
But, what if the quota is too high? Too low? Or impossible to
change when it needs to be updated? These questions about the appropriate level
and administration of a quota go to an assessment of the “right size” of the
banking sector that will have to be answered whether or not we have bounds.
53
And once a consensus regarding these open questions has been reached,
bounds-based regulations will be an effective way to credibly commit to the agreed
upon limits.
B. Bounds and Regulatory
Ratings
In this Section, I discuss the possible use of bounds in the
OCC’s regulatory ratings system. While much attention has been paid to credit
ratings agencies (CRAs) and how to fix the broken pieces of that regime,
54
not as much has been written about the rating that regulators give to
supervised banks. Considering that the prescriptions and reform proposals from
the CRA critique involve shifting much of the work that was previously done by
CRAs to the regulators, the time is now ripe to turn our attention to the
regulatory ratings process.
55
To provide a brief introduction, the OCC uses a “uniform
interagency rating system[]” that has been jointly adopted by federal bank and
thrift regulatory agencies to assign ratings to subjects.
56
The CAMELS rating, as it is also known, is a composite of six component
assessments: capital adequacy, asset quality, management
capability, earnings quality, liquidity adequacy, and sensitivity
to market risk.
57
For each component of CAMELS, the subject is given a rating ranging from one to
five, with a one rating indicating the strongest performance and a five being
the weakest.
58
The ratings process can best be described as one that is
customized to the institution. It takes into account each institution’s size
and sophistication, the nature and complexity of its activities, and its risk
profile.
59
Further, bank supervision responsibilities are assigned on a bank-by-bank
basis, with a dedicated commissioned national bank examiner assigned to each
examined bank (on a rotation basis).
60
While this regulatory philosophy and approach that values
consistency and continuity
within
each subject is important to ensure that the supervisory process identifies
risks and deficiencies that are unique to an institution, it raises two
concerns: one is the lack of comparability of ratings
between
subjects and second is the potential for ratings inflation.
A bank given a rating of one will have no way of knowing where it stands in
relation to its peers because it does not know how many one ratings were given
(in the extreme case, all banks could have received the same rating). Unlike
chartering decisions, which are made public, bank regulatory ratings are not
disclosed. They are known only to the regulator and the senior management of
the rated bank. And if regulators over time develop a positive bias towards
subjects (also referred to as “regulatory capture”),
61
banks may be given a higher rating than the principal would deem appropriate,
leading to inflation.
Bounds could provide a solution to the comparability and
inflation concerns. In this case, the use of a curve would be appropriate.
First, the beauty of a curve is that it forces the agent to compare subjects to
one another. A statutorily set ratings curve would require the OCC to consider
all rated subjects before determining the ratings assignments. And a curve, by
definition, avoids ratings inflation (or deflation, for that matter). The
implementation of a curve would also shed some light on an otherwise opaque
practice. The presence and disclosure of a curve can help banks understand
where they stand relative to their peers without the need to know the specific
ratings assigned to competitor banks.
Ranking institutions of various size, geography, risk
appetite, etc., according to a single cohesive standard is difficult and
complex, and requires inevitable judgment calls.
62
Notwithstanding such challenges, the benefit of a bound such as a curve (and
the planning and design required to implement such a bound) is that it can
manage the biases and errors of regulators. Furthermore, the regulatory
structure within the OCC is already set up as a pyramid
structure—portfolio managers report to the examiner-in-charge who then
reports to the supervisory office—which lends itself to a process where
ratings decisions are made by a centralized supervisory body within the agent. Such
an effort to centralize would also be consistent with the OCC’s commitment to
identifying and measuring risk using common definitions and common methods of
evaluation.
63
Lastly, the regulatory ratings procedure is not intended to replace banks’
internal models of risk and private ratings organizations’ efforts to generate
and maintain tailored and sophisticated measures of risk.
Another challenge to using a curve is its bluntness. For
instance, a bank may have scored worse than its peers but only by a small
margin—and a curve may result in a ratings differential that overstates
that small margin. This concern is especially compelling given my earlier
assessment above of the banking sector as one with relative little variability.
However, it is precisely this kind of resistance to treating banks adversely
that has overheated the finance sector.
One consensus that has emerged from the post-crisis legal and
finance literature is the need for countercyclical regulation. Countercyclical
regulation refers to policies that clamp down during boom periods and loosen up
during bust periods.
64
Countercyclical regulation has two main objectives: the first is to prevent the
growth of asset bubbles and the second is to require financial institutions to
build up reserves when times are good.
65
Bounds can be used to carry out both those objectives. First, as the national
bank charter quota example shows, bounds can counteract regulatory inertia
toward overbanking by imposing limits on the OCC’s chartering authority even
during times when there are no obvious or urgent deficiencies in the banking
sector. Second, as the relative regulatory ratings curve example shows, bounds
can be used to recognize and reward top performers who outperform their peers
(and penalize laggards) and to facilitate a race to the top among subjects.
Conclusion
As Listokin
articulates in
Bounded Institutions
the promise of bounds is that they can be used to reach ideal outcomes even
when the principal is uninformed and the agent is biased. This has immense
appeal for banking, where information gaps and biases are pervasive. Another
advantage of bounds for bank regulation is that they force comparisons among
subjects, which is useful for systemic risk regulation. Bounds can also be used
as a means to credibly commit to countercyclical measures that have recently
been proposed as an antidote to bubbles in finance.
While I show in this Response that the banking environment is
a theoretically appealing setting for bounds, some additional conditions must also
be fulfilled for the successful design and implementation of bounds in bank
regulation. They include the availability of comprehensive and quality data
regarding the regulated subjects and the principal and agent’s willingness to
consider new regulatory strategies. Furthermore, it must be recognized that the
regulated subjects are not static participants, and the subjects’ anticipated
response to bounds must be built into the design of the bounds in order for
bounded structures to reach their desired outcomes. In order to realize the
promise of bounds in bank regulation, principals and agents must know of the
quality and behaviors of the subjects they regulate, and the goals of
principal, agent, and the regulated subjects must be aligned.
Sung Eun (Summer) Kim is an Assistant
Professor of Law at University of California, Irvine, School of Law. She is
grateful to Michele Goodwin and to Arden Rowell for helpful discussions; to
Kate Poorbaugh and to Lisa Junghahn and Jackie Woodside of the University of
California, Irvine, Law Library for research assistance; to Joe Masterman,
David Simins and Mike Clemente of the
Yale Law Journal
for editorial
assistance; and to Yair Listokin and the
Yale Law Journal
for this opportunity and forum to engage in
these discussions.
Preferred
Citation: Sung Eun (Summer) Kim,
Bounds
in Bank Regulation
, 125
Yale L.J. F.
185
(2015), http://www.yalelawjournal.org/forum/bounds-in-bank-regulation.
Yair Listokin,
Bounded Institutions
, 124
Yale L.J.
336 (2014).
Yair Listokin,
Bounded Institutions
, 124
Yale L.J.
336 (2014).
The terms “principal” and “agent” are used herein to refer to the principal-agent relation…
The terms “principal” and “agent” are used herein to refer to the principal-agent relationship that arises when one person (the principal) manifests assent to another person (its agent) acting on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to such an arrangement. For a formal definition of agency, see
Restatement (Third) Of Agency
§ 1.01 (2006).
Bounds are distinguishable from rules in that bounds require agents to compare subjects to each ot…
Bounds are distinguishable from rules in that bounds require agents to compare subjects to each other. Rules, on the other hand, specify ex ante how agents should regulate subjects based on subject-specific factual characteristics.
See
Listokin,
supra
note 1, at 350-51.
Id.
at 346 tbl.1.
Id.
at 346 tbl.1.
This view that regulatory agencies act as agents of Congress has been articulated elsewhere.
See, …
This view that regulatory agencies act as agents of Congress has been articulated elsewhere.
See, e.g.
, Richard L. Revesz,
Specialized Courts and the Administrative Lawmaking System
, 138
U. Pa. L. Rev.
1111, 1140 (1990) (“Congress, the principal, delegates certain functions to its agent, the administrative agency, expecting that benefits will accrue to it through this delegation.”); Daniel B. Rodriguez,
The Positive Political Dimensions of Regulatory Reform
, 72
Wash. U. L.Q.
1, 50-51 (1994) (“The relationship between Congress and an administrative agency might be accurately characterized in hierarchical terms: Congress acts, as a principal, to control the actions of its agency-agent.”).
Alternative formulations are possible. For example, the subjects could be bank regulations rather …
Alternative formulations are possible. For example, the subjects could be bank regulations rather than the regulated banks, and the agent could be the Federal Deposit Insurance Corporation or the Federal Reserve, both of which also oversee different aspects of banking. But I will use the above designation as the basic framework throughout this Response. The scope of this Response is limited to U.S. federal regulation of banks, and the implications of the dual (federal and state) banking structure or transnational financial regulation on the bounded institutions construct is outside of the scope of this Response.
For an application of the framework to the National Science Foundation (NSF), see Listokin,
supra
For an application of the framework to the National Science Foundation (NSF), see Listokin,
supra
note 1, at 356-61.
Id.
at 341.
Id.
at 341.
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Yea…
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2014
(2014) [hereinafter 2014
Report
].
10
Robin Greenwood & David Scharfstein,
The Growth of Finance
, 27
J. Econ. Perspectives 3, 3 (2013)
Robin Greenwood & David Scharfstein,
The Growth of Finance
, 27
J. Econ. Perspectives 3, 3 (2013)
11
See
2014 Report,
supra
note
Office of the Comptroller of the Currency, U.S. Dep’t of the Trea…
See
2014 Report,
supra
note
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2010,
at
(2010);
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2005,
at
(2005).
12
12
C.F.R §
5.20(e)(1) (2015).
12
C.F.R §
5.20(e)(1) (2015).
13
Henry N. Butler & Jonathan R. Macey,
The Myth of Competition in the Dual Banking System
, 73
Cornel…
Henry N. Butler & Jonathan R. Macey,
The Myth of Competition in the Dual Banking System
, 73
Cornell L. Rev.
677, 678 (1988) (“Federal preemption and uniformity, rather than competition and diversity, are the legal norms in banking regulation.”).
14
Listokin,
supra
note 1, at 344.
Listokin,
supra
note 1, at 344.
15
Id.
at 345.
Id.
at 345.
16
For a discussion of financial laws’ inability to prevent bubbles and mitigate destruction after …
For a discussion of financial laws’ inability to prevent bubbles and mitigate destruction after bubbles pop, see
Erik F. Gerding, Law, Bubbles, and Financial Regulation
(2014).
17
See
Fin. Crisis Inquiry Comm’n, The Financial Crisis Inquiry Report
xv-xxvii (2011).
See
Fin. Crisis Inquiry Comm’n, The Financial Crisis Inquiry Report
xv-xxvii (2011).
18
Markus Brunnermeier et al., The Fundamental Principles of Financial Regulation
10 (2009) (“There…
Markus Brunnermeier et al., The Fundamental Principles of Financial Regulation
10 (2009) (“There are two aspects of the boundary problem; the shift of activity to unregulated players; and the use of financial engineering to enable given capital to support more credit.”).
19
See
Sung Eun (Summer) Kim,
Managing Regulatory Blindspots: A Case Study of Leveraged Loans
, 32
Yal…
See
Sung Eun (Summer) Kim,
Managing Regulatory Blindspots: A Case Study of Leveraged Loans
, 32
Yale J. on Reg.
89, 107-108 (2015) (highlighting the boundary problems in the regulation of leveraged loans).
20
See
Listokin,
supra
note 1, at 364-65. For a discussion of the distinction between bounds and rule…
See
Listokin,
supra
note 1, at 364-65. For a discussion of the distinction between bounds and rules as regulatory strategies, see
supra
note 3 and accompanying text.
21
See
Listokin,
supra
note 1, at 364-65.
See
Listokin,
supra
note 1, at 364-65.
22
For instance, the IMF’s Fiscal Affairs Department and Offices in Europe recently organized a wor…
For instance, the IMF’s Fiscal Affairs Department and Offices in Europe recently organized a workshop titled “The Future of Rules-Based Fiscal Policy” to discuss whether the current rules-based approach to guide financial policies has become “too complex to effectively guide policy makers, and too opaque to anchor expectations and be credible in the eyes of public opinion?”
IMF Fiscal Affairs Department Workshop on “The Future of Rules-Based Fiscal Policy
Int’l Monetary Fund
(2015),
[http://perma.cc/9CLF-RZZS].
23
For a survey of this literature, see Andrew W. Lo,
Reading About the Financial Crisis: A Twenty-On…
For a survey of this literature, see Andrew W. Lo,
Reading About the Financial Crisis: A Twenty-One-Book Review
, 50
J. of Econ. Literature
151 (2012).
24
See
Fin. Crisis Inquiry Comm’n,
supra
note
17
, at xv-xxvii
(describing red flags that were missed …
See
Fin. Crisis Inquiry Comm’n,
supra
note
17
, at xv-xxvii
(describing red flags that were missed by regulators in the years leading up to the 2007-2009 financial crisis).
25
See
Listokin,
supra
note 1, at 351.
See
Listokin,
supra
note 1, at 351.
26
See
Kristin N. Johnson,
Macroprudential Regulation: A Sustainable Approach to Regulating Financial…
See
Kristin N. Johnson,
Macroprudential Regulation: A Sustainable Approach to Regulating Financial Markets
, 2013
U. Ill. L. Rev.
881, 887
Kathryn Judge,
Interbank Discipline
, 60
UCLA L. Rev.
1262 (2013); Steven L. Schwarcz,
Systemic Risk
, 97
Geo. L. J.
193, 206 (2008).
27
See, e.g.
, Dan Awrey,
Regulating Financial Innovation: A More Principles-Based Proposal?
, 5
Brook.…
See, e.g.
, Dan Awrey,
Regulating Financial Innovation: A More Principles-Based Proposal?
, 5
Brook. J. Corp. Fin. & Com. L.
273, 282 (2011) (referring to the “historically predominant rules-based approaches toward financial regulation”); John H. Walsh,
Institution-Based Financial Regulation: A Third Paradigm
, 49
Harv. Int’l L.J.
381, 381 (2008) (explaining how U.S. financial regulation is rules-based).
28
Listokin,
supra
note 1, at 341-42, 378-79.
Listokin,
supra
note 1, at 341-42, 378-79.
29
Id.
at 378-79.
Id.
at 378-79.
30
For a discussion of how regulators of financial institutions are independent agencies that are als…
For a discussion of how regulators of financial institutions are independent agencies that are also exempt from congressional appropriations, see Note,
Independence, Congressional Weakness, and the Importance of Appointment: The Impact of Combining Budgetary Autonomy with Removal Protection
, 125
Harv. L. Rev.
1822, 1823 n.12 (2012).
31
About the OCC
Office of the Comptroller of the Currency
, http://www.occ.gov/about/what-we-do/miss…
About the OCC
Office of the Comptroller of the Currency
[http://perma.cc/Z5L8-HV72].
32
FY 2016 Budget-in-Brief: Office of the Comptroller of the Currency (OCC)
U.S. Dep’t Treasury
(201…
FY 2016 Budget-in-Brief: Office of the Comptroller of the Currency (OCC)
U.S. Dep’t Treasury
(2015),
[http://perma.cc/7NHD-GX2R].
33
For a discussion of each such powers, see 3
Charles H. Koch, Jr., William S. Jordan III & Richard …
For a discussion of each such powers, see 3
Charles H. Koch, Jr., William S. Jordan III & Richard Murphy, Administrative Law & Practice
§§ 7:21, 7:24, 12.10 (3d ed. 2010 & Supp. 2015).
34
Listokin,
supra
note 1, at 368-69.
Listokin,
supra
note 1, at 368-69.
35
Cf.
John C. Coates IV,
Cost-Benefit Analysis of Financial Regulation: Case Studies and Implication…
Cf.
John C. Coates IV,
Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications
, 124
Yale L.J.
882 (2015) (describing the challenges to cost-benefit analysis for financial regulation). Following the publication of Coates’ article, the
Yale Law Journal Forum
published a collection of responses (and Coates’ reply thereto). This collection of writings is available at 124
Yale L.J. F.
246, 246-315 (2015).
36
Carmen M. Reinhart & Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly
(2009). For a discussion of how to legitimize bailouts in light of their inevitability, see generally Adam J. Levitin,
In Defense of Bailouts
, 99
Geo. L.J.
435 (2011).
37
For a survey of the principal supervisory strategies used by financial regulators to regulate risk…
For a survey of the principal supervisory strategies used by financial regulators to regulate risks, see Howell E. Jackson,
Regulation in a Multisectored Financial Services Industry
, 77
Wash. U. L. Q.
319, 339-63 (1999).
38
See
Listokin,
supra
note 1, at 362.
See
Listokin,
supra
note 1, at 362.
39
Id.
Id.
40
Roberta Romano,
Regulating in the Dark
in
Regulatory Breakdown: the Crisis of Confidence in U.S. …
Roberta Romano,
Regulating in the Dark
in
Regulatory Breakdown: the Crisis of Confidence in U.S. Regulation (
Cary Coglianese ed.,
2012)
41
One recent example of such consensus building is the New York Department of Financial Services’s…
One recent example of such consensus building is the New York Department of Financial Services’s (NYDFS) recent public hearings on the regulation of virtual currencies, which were held in January 2014.
See
NYDFS,
Virtual Currency Hearings, Day 1, Panel 1
(Jan. 31, 2014),
[http://perma.cc/BMV7-UDVP]
; NYDFS
Virtual Currency Hearings, Day 1, Panel 2
(Jan. 31, 2014),
[http://perma.cc/6YNC-VTSM]
; NYDFS,
Virtual Currency Hearings, Day 2, Panel 1
(Jan. 31, 2014),
[http://perma.cc/PYW9-E7ZQ]; NYDFS,
Virtual Currency Hearings, Day 2, Panel 2
(Jan. 31, 2014),
[http://perma.cc/LY6K-EMSC]; NYDFS
Virtual Currency Hearings, Day 2, Panel 3
(Jan. 31 2014),
[http://perma.cc/96CU-8RAM]. Following the January 2014 hearings, NYDFS released its proposed “BitLicense” regulatory framework for New York virtual currency businesses.
See
Dep’t of Fin. Servs
.,
Revised BitLicense Regulatory Framework
(2015),
[http://perma.cc/BE42-L4ZU]
42
For a survey of the academic literature and an account of bank regulators’ efforts to incorporat…
For a survey of the academic literature and an account of bank regulators’ efforts to incorporate market signals into bank supervision, see Timothy J. Curry, Peter J. Elmer, & Gary S. Fissel,
Using Market Information to Help Identify Distressed Institutions: A Regulatory Perspective
, 15
FDIC Banking Rev
., no. 3, 2003, at 1.
43
About the OFR
Office of Fin. Research
, http://financialresearch.gov/about
[http://perma.cc/5NWM-G…
About the OFR
Office of Fin. Research
[http://perma.cc/5NWM-GBZ9]
44
12 C.F.R. § 5.20(b) (2015) (describing licensing requirements).
12 C.F.R. § 5.20(b) (2015) (describing licensing requirements).
45
Cf.
Model Bus. Corp. Act
§ 1.25(d) (2010) (describing the secretary of state’s filing of the c…
Cf.
Model Bus. Corp. Act
§ 1.25(d) (2010) (describing the secretary of state’s filing of the corporate charter as a ministerial task).
46
12 C.F.R. § 5.20(f).
12 C.F.R. § 5.20(f).
47
Camp v. Pitts, 411 U.S. 138, 142 (1973) (per curiam).
Camp v. Pitts, 411 U.S. 138, 142 (1973) (per curiam).
48
Arthur E. Wilmarth, Jr.,
The Dodd-Frank Act’s Expansion of State Authority To Protect Consumers …
Arthur E. Wilmarth, Jr.,
The Dodd-Frank Act’s Expansion of State Authority To Protect Consumers of Financial Servic
es, 36
J. Corp. L.
893, 915-16 (2011)
(describing the conflict of interest between supervisory duties and budgetary concerns arising from the funding structure).
49
The constitutionality of Congress’ power to charter national banks (as within its power to regul…
The constitutionality of Congress’ power to charter national banks (as within its power to regulate interstate commerce) was upheld in
McCulloch v. Maryland
, 17 U.S. (4 Wheat.) 316 (1819).
50
The Federal Reserve Board’s recently finalized rule, which limits bank mergers or acquisitions i…
The Federal Reserve Board’s recently finalized rule, which limits bank mergers or acquisitions if the liabilities of the combined entity will exceed more than ten percent of the liabilities in the financial system, is a move in this direction. The final rule (also referred to as Regulation XX or the “Concentration Limit on Large Financial Companies”) was issued by the Federal Reserve Board on November 4, 2015 to implement section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
See
12 C.F.R. § 251 (2015).
51
Not only are more examinations conducted as part of the licensing process, but the OCC has also ma…
Not only are more examinations conducted as part of the licensing process, but the OCC has also made clear that de novo banks are more intensively monitored and closely supervised.
Comptroller of the Currency
Bank Supervision Process: Comptroller’s Handbook
11-12 (Oct. 2014) [hereinafter
Comptroller’s Handbook
].
52
The OCC grants a shelf charter to prospective acquirers for this specific purpose.
The OCC grants a shelf charter to prospective acquirers for this specific purpose.
53
See generally
Gary H. Stern & Ron Feldman,
Addressing TBTF by Shrinking Financial Institutions: An…
See generally
Gary H. Stern & Ron Feldman,
Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment
Fed. Reserve Bank of Minneapolis: The Region
(June 1, 2009),
[http://perma.cc/JD3D-4PLU]; Mark J. Flannery,
What To Do About TBTF?
Fed. Reserve Bank of Atl.
(May 12, 2010),
[http://perma.cc/K3B2-3J2D].
54
See, e.g.
, Lynn Bai,
On Regulating Conflicts of Interest in the Credit Rating Industry
, 13
N.Y.U. …
See, e.g.
, Lynn Bai,
On Regulating Conflicts of Interest in the Credit Rating Industry
, 13
N.Y.U. J. Legis & Pub. Pol’y
253 (2010); Robert J. Rhee,
On Duopoly and Compensation Games in the Credit Rating Industry
, 108
Nw. U. L. Rev.
85 (2013).
55
For a summary of the sections of the Dodd-Frank Act that require that references to credit ratings…
For a summary of the sections of the Dodd-Frank Act that require that references to credit ratings be removed from statute and regulation, see
Baird Webel, Cong. Research Serv., R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Issues and Summary
15-17 (2010).
56
Comptroller’s Handbook
supra
note 51, at 9.
Comptroller’s Handbook
supra
note 51, at 9.
57
Id.
Id.
58
A detailed description of each of the component ratings, including a list of principal evaluation …
A detailed description of each of the component ratings, including a list of principal evaluation factors as well as a description of each numerical rating for each component, can be found in the Comptroller’s Handbook of the bank supervision process.
Id.
at 46-54.
59
Id.
at 9.
Id.
at 9.
60
Id.
at 5 (“Personnel selected for these assignments are rotated periodically to ensure that thei…
Id.
at 5 (“Personnel selected for these assignments are rotated periodically to ensure that their supervisory perspective remains objective.”).
61
See, e.g.
, Richard A. Posner,
Theories of Economic Regulation
5 Bell J. Econ. Mgm’t Sci. 335
, 335…
See, e.g.
, Richard A. Posner,
Theories of Economic Regulation
5 Bell J. Econ. Mgm’t Sci. 335
, 335-36 (1974) (explaining the theory of regulatory capture); George J. Stigler,
The Theory of Economic Regulation
, 2
Bell J. Econ.
3, 4 (1971).
62
The Uniform Bank Performance Report (UBPR), developed by the Federal Financial Institutions Examin…
The Uniform Bank Performance Report (UBPR), developed by the Federal Financial Institutions Examination Council (FFIEC), has published peer group average data on banks’ performance and balance-sheet composition data since 2003.
See UBPR
Fed. Fin. Insts. Examination Council
[http://perma.cc/5UGH-EW6F]. It can be a useful guide in setting the curve and overcoming some of the practical challenges of implementing such a curve.
63
Comptroller’s Handbook
supra
note 51, at 19.
Comptroller’s Handbook
supra
note 51, at 19.
64
On the other hand, pro-cyclical regulation refers to policies that clamp down during bust periods …
On the other hand, pro-cyclical regulation refers to policies that clamp down during bust periods and loosen up during boom periods. For a review of ongoing debate over the objectives, tools, and impediments to countercyclical regulation, see Patricia A. McCoy,
Countercyclical Regulation and its Challenges
Bos. Coll. Law Sch. Digital Commons
(Feb. 17, 2015),
[http://perma.cc/RPF2-5JXA].
65
Id.
at 2.
Id.
at 2.
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Yair Listokin,
Bounded Institutions
, 124
Yale L.J.
336 (2014).
The terms “principal” and “agent” are used herein to refer to the principal-agent relationship that arises when one person (the principal) manifests assent to another person (its agent) acting on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to such an arrangement. For a formal definition of agency, see
Restatement (Third) Of Agency
§ 1.01 (2006).
Bounds are distinguishable from rules in that bounds require agents to compare subjects to each other. Rules, on the other hand, specify ex ante how agents should regulate subjects based on subject-specific factual characteristics.
See
Listokin,
supra
note 1, at 350-51.
Id.
at 346 tbl.1.
This view that regulatory agencies act as agents of Congress has been articulated elsewhere.
See, e.g.
, Richard L. Revesz,
Specialized Courts and the Administrative Lawmaking System
, 138
U. Pa. L. Rev.
1111, 1140 (1990) (“Congress, the principal, delegates certain functions to its agent, the administrative agency, expecting that benefits will accrue to it through this delegation.”); Daniel B. Rodriguez,
The Positive Political Dimensions of Regulatory Reform
, 72
Wash. U. L.Q.
1, 50-51 (1994) (“The relationship between Congress and an administrative agency might be accurately characterized in hierarchical terms: Congress acts, as a principal, to control the actions of its agency-agent.”).
Alternative formulations are possible. For example, the subjects could be bank regulations rather than the regulated banks, and the agent could be the Federal Deposit Insurance Corporation or the Federal Reserve, both of which also oversee different aspects of banking. But I will use the above designation as the basic framework throughout this Response. The scope of this Response is limited to U.S. federal regulation of banks, and the implications of the dual (federal and state) banking structure or transnational financial regulation on the bounded institutions construct is outside of the scope of this Response.
For an application of the framework to the National Science Foundation (NSF), see Listokin,
supra
note 1, at 356-61.
Id.
at 341.
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2014
(2014) [hereinafter 2014
Report
].
10
Robin Greenwood & David Scharfstein,
The Growth of Finance
, 27
J. Econ. Perspectives 3, 3 (2013)
11
See
2014 Report,
supra
note
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2010,
at
(2010);
Office of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Annual Report: Fiscal Year 2005,
at
(2005).
12
12
C.F.R §
5.20(e)(1) (2015).
13
Henry N. Butler & Jonathan R. Macey,
The Myth of Competition in the Dual Banking System
, 73
Cornell L. Rev.
677, 678 (1988) (“Federal preemption and uniformity, rather than competition and diversity, are the legal norms in banking regulation.”).
14
Listokin,
supra
note 1, at 344.
15
Id.
at 345.
16
For a discussion of financial laws’ inability to prevent bubbles and mitigate destruction after bubbles pop, see
Erik F. Gerding, Law, Bubbles, and Financial Regulation
(2014).
17
See
Fin. Crisis Inquiry Comm’n, The Financial Crisis Inquiry Report
xv-xxvii (2011).
18
Markus Brunnermeier et al., The Fundamental Principles of Financial Regulation
10 (2009) (“There are two aspects of the boundary problem; the shift of activity to unregulated players; and the use of financial engineering to enable given capital to support more credit.”).
19
See
Sung Eun (Summer) Kim,
Managing Regulatory Blindspots: A Case Study of Leveraged Loans
, 32
Yale J. on Reg.
89, 107-108 (2015) (highlighting the boundary problems in the regulation of leveraged loans).
20
See
Listokin,
supra
note 1, at 364-65. For a discussion of the distinction between bounds and rules as regulatory strategies, see
supra
note 3 and accompanying text.
21
See
Listokin,
supra
note 1, at 364-65.
22
For instance, the IMF’s Fiscal Affairs Department and Offices in Europe recently organized a workshop titled “The Future of Rules-Based Fiscal Policy” to discuss whether the current rules-based approach to guide financial policies has become “too complex to effectively guide policy makers, and too opaque to anchor expectations and be credible in the eyes of public opinion?”
IMF Fiscal Affairs Department Workshop on “The Future of Rules-Based Fiscal Policy
Int’l Monetary Fund
(2015),
[http://perma.cc/9CLF-RZZS].
23
For a survey of this literature, see Andrew W. Lo,
Reading About the Financial Crisis: A Twenty-One-Book Review
, 50
J. of Econ. Literature
151 (2012).
24
See
Fin. Crisis Inquiry Comm’n,
supra
note
17
, at xv-xxvii
(describing red flags that were missed by regulators in the years leading up to the 2007-2009 financial crisis).
25
See
Listokin,
supra
note 1, at 351.
26
See
Kristin N. Johnson,
Macroprudential Regulation: A Sustainable Approach to Regulating Financial Markets
, 2013
U. Ill. L. Rev.
881, 887
Kathryn Judge,
Interbank Discipline
, 60
UCLA L. Rev.
1262 (2013); Steven L. Schwarcz,
Systemic Risk
, 97
Geo. L. J.
193, 206 (2008).
27
See, e.g.
, Dan Awrey,
Regulating Financial Innovation: A More Principles-Based Proposal?
, 5
Brook. J. Corp. Fin. & Com. L.
273, 282 (2011) (referring to the “historically predominant rules-based approaches toward financial regulation”); John H. Walsh,
Institution-Based Financial Regulation: A Third Paradigm
, 49
Harv. Int’l L.J.
381, 381 (2008) (explaining how U.S. financial regulation is rules-based).
28
Listokin,
supra
note 1, at 341-42, 378-79.
29
Id.
at 378-79.
30
For a discussion of how regulators of financial institutions are independent agencies that are also exempt from congressional appropriations, see Note,
Independence, Congressional Weakness, and the Importance of Appointment: The Impact of Combining Budgetary Autonomy with Removal Protection
, 125
Harv. L. Rev.
1822, 1823 n.12 (2012).
31
About the OCC
Office of the Comptroller of the Currency
[http://perma.cc/Z5L8-HV72].
32
FY 2016 Budget-in-Brief: Office of the Comptroller of the Currency (OCC)
U.S. Dep’t Treasury
(2015),
[http://perma.cc/7NHD-GX2R].
33
For a discussion of each such powers, see 3
Charles H. Koch, Jr., William S. Jordan III & Richard Murphy, Administrative Law & Practice
§§ 7:21, 7:24, 12.10 (3d ed. 2010 & Supp. 2015).
34
Listokin,
supra
note 1, at 368-69.
35
Cf.
John C. Coates IV,
Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications
, 124
Yale L.J.
882 (2015) (describing the challenges to cost-benefit analysis for financial regulation). Following the publication of Coates’ article, the
Yale Law Journal Forum
published a collection of responses (and Coates’ reply thereto). This collection of writings is available at 124
Yale L.J. F.
246, 246-315 (2015).
36
Carmen M. Reinhart & Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly
(2009). For a discussion of how to legitimize bailouts in light of their inevitability, see generally Adam J. Levitin,
In Defense of Bailouts
, 99
Geo. L.J.
435 (2011).
37
For a survey of the principal supervisory strategies used by financial regulators to regulate risks, see Howell E. Jackson,
Regulation in a Multisectored Financial Services Industry
, 77
Wash. U. L. Q.
319, 339-63 (1999).
38
See
Listokin,
supra
note 1, at 362.
39
Id.
40
Roberta Romano,
Regulating in the Dark
in
Regulatory Breakdown: the Crisis of Confidence in U.S. Regulation (
Cary Coglianese ed.,
2012)
41
One recent example of such consensus building is the New York Department of Financial Services’s (NYDFS) recent public hearings on the regulation of virtual currencies, which were held in January 2014.
See
NYDFS,
Virtual Currency Hearings, Day 1, Panel 1
(Jan. 31, 2014),
[http://perma.cc/BMV7-UDVP]
; NYDFS
Virtual Currency Hearings, Day 1, Panel 2
(Jan. 31, 2014),
[http://perma.cc/6YNC-VTSM]
; NYDFS,
Virtual Currency Hearings, Day 2, Panel 1
(Jan. 31, 2014),
[http://perma.cc/PYW9-E7ZQ]; NYDFS,
Virtual Currency Hearings, Day 2, Panel 2
(Jan. 31, 2014),
[http://perma.cc/LY6K-EMSC]; NYDFS
Virtual Currency Hearings, Day 2, Panel 3
(Jan. 31 2014),
[http://perma.cc/96CU-8RAM]. Following the January 2014 hearings, NYDFS released its proposed “BitLicense” regulatory framework for New York virtual currency businesses.
See
Dep’t of Fin. Servs
.,
Revised BitLicense Regulatory Framework
(2015),
[http://perma.cc/BE42-L4ZU]
42
For a survey of the academic literature and an account of bank regulators’ efforts to incorporate market signals into bank supervision, see Timothy J. Curry, Peter J. Elmer, & Gary S. Fissel,
Using Market Information to Help Identify Distressed Institutions: A Regulatory Perspective
, 15
FDIC Banking Rev
., no. 3, 2003, at 1.
43
About the OFR
Office of Fin. Research
[http://perma.cc/5NWM-GBZ9]
44
12 C.F.R. § 5.20(b) (2015) (describing licensing requirements).
45
Cf.
Model Bus. Corp. Act
§ 1.25(d) (2010) (describing the secretary of state’s filing of the corporate charter as a ministerial task).
46
12 C.F.R. § 5.20(f).
47
Camp v. Pitts, 411 U.S. 138, 142 (1973) (per curiam).
48
Arthur E. Wilmarth, Jr.,
The Dodd-Frank Act’s Expansion of State Authority To Protect Consumers of Financial Servic
es, 36
J. Corp. L.
893, 915-16 (2011)
(describing the conflict of interest between supervisory duties and budgetary concerns arising from the funding structure).
49
The constitutionality of Congress’ power to charter national banks (as within its power to regulate interstate commerce) was upheld in
McCulloch v. Maryland
, 17 U.S. (4 Wheat.) 316 (1819).
50
The Federal Reserve Board’s recently finalized rule, which limits bank mergers or acquisitions if the liabilities of the combined entity will exceed more than ten percent of the liabilities in the financial system, is a move in this direction. The final rule (also referred to as Regulation XX or the “Concentration Limit on Large Financial Companies”) was issued by the Federal Reserve Board on November 4, 2015 to implement section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
See
12 C.F.R. § 251 (2015).
51
Not only are more examinations conducted as part of the licensing process, but the OCC has also made clear that de novo banks are more intensively monitored and closely supervised.
Comptroller of the Currency
Bank Supervision Process: Comptroller’s Handbook
11-12 (Oct. 2014) [hereinafter
Comptroller’s Handbook
].
52
The OCC grants a shelf charter to prospective acquirers for this specific purpose.
53
See generally
Gary H. Stern & Ron Feldman,
Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment
Fed. Reserve Bank of Minneapolis: The Region
(June 1, 2009),
[http://perma.cc/JD3D-4PLU]; Mark J. Flannery,
What To Do About TBTF?
Fed. Reserve Bank of Atl.
(May 12, 2010),
[http://perma.cc/K3B2-3J2D].
54
See, e.g.
, Lynn Bai,
On Regulating Conflicts of Interest in the Credit Rating Industry
, 13
N.Y.U. J. Legis & Pub. Pol’y
253 (2010); Robert J. Rhee,
On Duopoly and Compensation Games in the Credit Rating Industry
, 108
Nw. U. L. Rev.
85 (2013).
55
For a summary of the sections of the Dodd-Frank Act that require that references to credit ratings be removed from statute and regulation, see
Baird Webel, Cong. Research Serv., R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Issues and Summary
15-17 (2010).
56
Comptroller’s Handbook
supra
note 51, at 9.
57
Id.
58
A detailed description of each of the component ratings, including a list of principal evaluation factors as well as a description of each numerical rating for each component, can be found in the Comptroller’s Handbook of the bank supervision process.
Id.
at 46-54.
59
Id.
at 9.
60
Id.
at 5 (“Personnel selected for these assignments are rotated periodically to ensure that their supervisory perspective remains objective.”).
61
See, e.g.
, Richard A. Posner,
Theories of Economic Regulation
5 Bell J. Econ. Mgm’t Sci. 335
, 335-36 (1974) (explaining the theory of regulatory capture); George J. Stigler,
The Theory of Economic Regulation
, 2
Bell J. Econ.
3, 4 (1971).
62
The Uniform Bank Performance Report (UBPR), developed by the Federal Financial Institutions Examination Council (FFIEC), has published peer group average data on banks’ performance and balance-sheet composition data since 2003.
See UBPR
Fed. Fin. Insts. Examination Council
[http://perma.cc/5UGH-EW6F]. It can be a useful guide in setting the curve and overcoming some of the practical challenges of implementing such a curve.
63
Comptroller’s Handbook
supra
note 51, at 19.
64
On the other hand, pro-cyclical regulation refers to policies that clamp down during bust periods and loosen up during boom periods. For a review of ongoing debate over the objectives, tools, and impediments to countercyclical regulation, see Patricia A. McCoy,
Countercyclical Regulation and its Challenges
Bos. Coll. Law Sch. Digital Commons
(Feb. 17, 2015),
[http://perma.cc/RPF2-5JXA].
65
Id.
at 2.