Table of Contents

Opening the Gate to Money Market Fund Reform

Hester Peirce, George Mason University - Mercatus Center
Robert Greene, George Mason University - Mercatus Center

Its Time to Replace Toxic Governance with Good Governance

Shann Turnbull, International Institute for Self-Governance, Sustainable Money Working Group

How Are Small Banks Faring Under Dodd-Frank?

Hester Peirce, George Mason University - Mercatus Center
Ian C Robinson, The Mercatus Center
Thomas Stratmann, George Mason University - Buchanan Center Political Economy, CESifo (Center for Economic Studies and Ifo Institute), Harvard University - Edmond J. Safra Center for Ethics

Foreign Activities of U.S. Banks Since 1997: The Roles of Regulations and Market Conditions in Crises and Normal Times

Judit Temesvary, Hamilton College, Cornell University

The Determinants of U.S. Banks’ International Activities

Judit Temesvary, Hamilton College, Cornell University


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Opening the Gate to Money Market Fund Reform" Free Download

HESTER PEIRCE, George Mason University - Mercatus Center
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ROBERT GREENE, George Mason University - Mercatus Center
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For decades, money market funds (MMFs) were thought to be safe, low-risk investments. The financial crisis of 2007-2009 cast MMFs in a new, less favorable light, which prompted calls for reform. Our paper offers a reform alternative that builds on MMF boards of directors and their well-established responsibility for making key decisions for MMFs. After a brief overview of the regulatory history of MMFs, we describe the responsibilities that boards have under current law, the problems MMFs encountered during the crisis, and market and government responses to these problems. Evidence shows that during the crisis, investors were discerning in deciding whether and when to run; more risky, less liquid funds experienced higher volumes of redemptions. This finding, along with our assessment of funds’ boards of directors’ responsibilities, helps to lay the groundwork for considering the various options for addressing problems still facing MMFs, including our proposal to allow boards to gate their funds when faced by potentially destabilizing redemption pressures.

"Its Time to Replace Toxic Governance with Good Governance" Free Download

SHANN TURNBULL, International Institute for Self-Governance, Sustainable Money Working Group
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The Australian financial system is exposed to the same toxic governance practices that caused the financial crisis in 2008. The US Government’s 2011 commission of inquiry into the crisis concluded that a “key cause? was “dramatic failures of corporate governance and risk management?. However, the Australian Prudential Regulatory Authority enforces US practices that become particularly toxic with Australia law. A shared source of toxicity arises from corporate constitutions providing directors with absolute power to corrupt themselves, their firm, and in the case of prudentially regulated institutions, the financial system and so the real economy. The solution is to amend constitutions to separate the power to govern from the power to manage while engaging with stakeholder constituencies to empower them to become co-regulators. A fundamental problem is that regulators, governance rating agencies and experts who formulate governance codes have not identified the objectives of good governance and so do not know where to head. Parliament is required to give direction. Good governance requires organizations to act ethically and fairly while minimizing harms, inequities, costs and risks on society by improving their self-governance. Self-governance is found in nature to allow creatures with little intelligence to reproduce in dynamic, complex unknowable environments. The paper describes how the laws of nature can be used to design the constitutions of organizations to follow the compelling success of simple creatures. The paper concludes that a Parliamentary inquiry is required to rectify the commitment by regulators, governance codes, and practitioners and their professional bodies to toxic governance.

"How Are Small Banks Faring Under Dodd-Frank?" Free Download
GMU Working Paper in Economics No. 14-49

HESTER PEIRCE, George Mason University - Mercatus Center
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IAN C ROBINSON, The Mercatus Center
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THOMAS STRATMANN, George Mason University - Buchanan Center Political Economy, CESifo (Center for Economic Studies and Ifo Institute), Harvard University - Edmond J. Safra Center for Ethics
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This paper presents the results of the Mercatus Center’s Small Bank Survey, which include responses from approximately 200 banks across 41 states with less than $10 billion in assets each, serving mostly rural and small metropolitan markets. The initial analysis suggests that Dodd-Frank significantly affects small banks and their customers. A large majority of respondents viewed Dodd-Frank as more burdensome than the Bank Secrecy Act, and the participating banks reported substantially increased compliance costs in the wake of new regulations. These costs include hiring new compliance personnel, increased reliance on outside compliance experts, additional resources allocated to compliance, and more time spent by noncompliance employees on compliance. The increased regulatory burdens have led small banks to reconsider their product and service offerings, including considering whether to stop providing residential mortgages. Many small bank customers, who will have difficulty locating convenient alternatives, will feel the indirect effects of Dodd-Frank.

"Foreign Activities of U.S. Banks Since 1997: The Roles of Regulations and Market Conditions in Crises and Normal Times" 
Journal of International Money and Finance, doi:10.1016/j.jimonfin.2014.09.008, Forthcoming

JUDIT TEMESVARY, Hamilton College, Cornell University
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Using a unique newly constructed dataset on U.S. banks' foreign activities since 1997, this paper examines how bank, market and regulatory conditions in the U.S. and host countries affect U.S. banks' choices of which foreign markets to enter and how much claims and liabilities to take on there. Using a two-stage structural estimation framework, the determinants of foreign market entry/exit, cross-border claims, and foreign affiliate claims and liabilities choices are examined in 107 host countries around the world. It is shown that (1) the health of the balance sheet is the primary driver of foreign market entry/exit choices (especially so during the Subprime crisis), while host market and regulatory conditions play important roles in the choice of claims/liabilities volumes; (2) banks choose their foreign activities during banking and market crises differently than they do in 'normal' times; and (3) in addition to bank size, previous experience with managing a global lending network significantly increases the intensity of banks' foreign involvement. Structural estimates of the costs of foreign market entry/exit and host market regulatory stringency are also derived.

"The Determinants of U.S. Banks’ International Activities" 
Journal of Banking and Finance, Vol. 44, 2014, 233-247

JUDIT TEMESVARY, Hamilton College, Cornell University
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This paper develops a model and structural dynamic estimation of bank behavior to map the relationship between U.S. banks’ choices of foreign banking activities, and bank and foreign market traits. This estimation framework is applied to a unique bank-level dataset compiled from regulatory sources, covering U.S. banks’ foreign activities in 83 host markets over the 2003-2013 period. Bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics. After controlling for these traits, the post-financial crisis period shows a structural shift away from cross-border claims towards foreign affiliate activities. Structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived. Simulation exercises confirm the strong impact of banks’ and regulators’ risk stance on bank profits and portfolio composition.

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

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Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Max L. Heine Professor of Finance and Vice Director, New York University (NYU) - Salomon Center, Max L. Heine Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor of Finance and Dykema Professor of Business Administration, University of Michigan, Stephen M. Ross School of Business

DONALD CHEW
Morgan Stanley Investment Management

JOHN DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science, Harry J. Loman Professor Emeritus, University of Pennsylvania - Insurance & Risk Management Department

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
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JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon Business School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management