Table of Contents

Regulating Bitcoin and Block Chain Derivatives

Houman B. Shadab, New York Law School

Promoting Efficient Retail Payments in Europe

Iftekhar Hasan, Fordham University, Bank of Finland
Emmi Martikainen, Finnish Competition and Consumer Authority
Tuomas Takalo, Bank of Finland, Monetary Policy and Research Department

The Global Risk Regime – New Roles for Auditors

Allan D. Grody, Financial InterGroup
Peter J. Hughes, University of Leeds - Leeds University Business School (LUBS)

Bank Size, Capital, and Systemic Risk: Some International Evidence

Luc Laeven, International Monetary Fund (IMF), Centre for Economic Policy Research (CEPR)
Lev Ratnovski, International Monetary Fund
Hui Tong, International Monetary Fund (IMF)

How Capital Regulation and Other Factors Drive the Role of Shadow Banking in Funding Short-Term Business Credit

John V. Duca, Federal Reserve Bank of Dallas

A Conceptual Framework for the Regulation of Cryptocurrencies

Omri Y. Marian, University of Florida - Fredric G. Levin College of Law

Arm's Length Financing and Innovation: Evidence from Publicly Traded Firms

Julian Atanassov, University of Oregon


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Regulating Bitcoin and Block Chain Derivatives" Free Download
NYLS Legal Studies Research Paper

HOUMAN B. SHADAB, New York Law School
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Bitcoins are scarce digital commodities that enable parties to transmit messages over a network that serves as a universal public ledger. Bitcoins fall within the definition of “commodity? under the Commodity Exchange Act (CEA) such that derivatives contracts that reference bitcoins are subject to regulation by the Commodity Futures Trading Commission. Like other derivatives, Bitcoin derivatives would likely not be subject to the full scope of regulation under the CEA to the extent such derivatives involve physical delivery (as opposed to cash settlement) or are nonfungible and not independently traded. In addition, Bitcoin swaps are currently too illiquid to be subject to mandatory clearing. A growing number of firms are offering Bitcoin derivatives, most of which are for retail traders. In addition to traditional derivatives that reference bitcoins, the Bitcoin (block chain) protocol can potentially enable automated derivatives contracts that securely trade, clear, and settle without the use of trusted intermediaries. The CFTC should consider an exemption for block chain derivatives that meet its policy objectives as a result of the rules that the underlying code applies to the transactions.

"Promoting Efficient Retail Payments in Europe" Free Download
Journal of Payments Strategy & Systems, Forthcoming
Bank of Finland Research Discussion Paper No. 20/2014

IFTEKHAR HASAN, Fordham University, Bank of Finland
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EMMI MARTIKAINEN, Finnish Competition and Consumer Authority
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TUOMAS TAKALO, Bank of Finland, Monetary Policy and Research Department
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​In this article we first document the evidence showing how an efficient retail payment infrastructure enhances economic performance. We then review the policy tools available to promote efficient retail payments in Europe. We argue that while SEPA is an important policy initiative that harmonizes payment methods across the EU, it alone is not enough. Vigorous competition and consumer protection policies as well as direct interventions discouraging large value cash payments would be particularly attractive policy tools as they would put no strain on stretched government budgets.

"The Global Risk Regime – New Roles for Auditors" Free Download

ALLAN D. GRODY, Financial InterGroup
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PETER J. HUGHES, University of Leeds - Leeds University Business School (LUBS)
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The Financial Stability Board (FSB) has invited auditors to play a more prominent role in assisting the FSB in their mandate to stabilize the global economy. In previous comments by the authors to the FSB they described a more granular role for auditors in assisting in the financial reforms underway since the financial crisis of 2007-8. A series of regulatory initiatives since then have surfaced to involve auditors directly, or that point to involving them further in the global regulator regimes overseen by the FSB. This paper reports on the role of auditors’ involvement to date and expands upon the authors’ earlier thoughts toward further involvement. The authors speculate on an expanded role for auditors to include: augmenting regulators’ staffs to perform due diligence on adherence to risk regime regulations; to perform functions of the FSB’s newly designated entity, the Trusted Third Party (TTP); to validate financial market participants’ identities within the FSB’s global legal entity identification (LEI) system (GLEIS); and to record standard ownership and control structures in the GLEIS that the FSB requires to adhere to the accounting profession’s consolidation rules. The authors further suggest extending the auditors’ role of validating the adequacy of internal controls that lead directly to postings to the general ledger to also encompass the controls between the general ledger and the risk management systems. This is now required by the Basel Committee on Banking Supervision’s principles for effective risk data aggregation and risk reporting, referred to as BCBS 239.

"Bank Size, Capital, and Systemic Risk: Some International Evidence" Free Download

LUC LAEVEN, International Monetary Fund (IMF), Centre for Economic Policy Research (CEPR)
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LEV RATNOVSKI, International Monetary Fund
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HUI TONG, International Monetary Fund (IMF)
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This paper studies the significant variation in the cross-section of standalone and systemic risk of large banks during the recent financial crisis to identify bank specific factors that determine risk. We find that systemic risk grows with bank size and is inversely related to bank capital, and this effect exists above and beyond the effect of bank size and capital on standalone bank risk. Our results contribute to the ongoing debate on the merits of imposing systemic risk-based capital requirements on banks.

"How Capital Regulation and Other Factors Drive the Role of Shadow Banking in Funding Short-Term Business Credit" Free Download

JOHN V. DUCA, Federal Reserve Bank of Dallas
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This paper analyzes how capital regulation, risk, and other factors altered the relative use of shadow banking system-funded, short-term business debt since the early 1960s. Results indicate that the share was affected over the long run not only by changing information and reserve requirement costs, but also by shifts in relative regulation of bank versus nonbank credit sources — such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow bank share rose when deposit interest rate ceilings were binding, the economic outlook improved, or risk premia declined, and fell when event risks disrupted financial markets.

"A Conceptual Framework for the Regulation of Cryptocurrencies" Free Download
University of Chicago Law Review Dialogue, Vol. 81, 2015 Forthcoming

OMRI Y. MARIAN, University of Florida - Fredric G. Levin College of Law
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This Essay proposes a conceptual framework for the regulation of transactions involving cryptocurrencies. Cryptocurrencies offer tremendous opportunities for innovation and development, but at the same time are uniquely suited to facilitate illicit behavior. The suggested regulatory framework is intended to support (or, at the least, not impair) cryptocurrencies’ innovative potential. At the same time, the aim is to disrupt cryptocurrencies’ utility for criminal activities. To achieve such purposes, this Essay suggests a regulatory framework that imposes costs on the characteristics of cryptocurrencies that make them particularly useful for criminal behavior (in particular, anonymity), but does not impose costs on characteristics that are at the core of the generative potential (in particular, the decentralization of value-transfer processes). Using a basic utility model of criminal behavior as a benchmark, the Essay explains how regulatory instruments can be so designed. One such regulatory instrument is proposed as an example – an elective anonymity tax on cryptocurrency transactions in which at least one party is not anonymous.

"Arm's Length Financing and Innovation: Evidence from Publicly Traded Firms" 
Management Science, Forthcoming

JULIAN ATANASSOV, University of Oregon
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Using a large panel of US companies, I document that firms that rely more on arm’s length financing such as public debt and equity, innovate more and have higher quality innovations, than firms that use other sources, such as relationship bank financing. I hypothesize that one possible reason for this finding is the greater flexibility and tolerance to experimentation associated with arm's length financing. I find support for this hypothesis by showing that firms with more arm's length financing have greater volatility of innovative output, and are more likely to innovate in new technological areas. Furthermore, focusing only on bank financing, I demonstrate that firms have more novel innovations if they borrow from multiple banks, use predominantly credit lines, and have less intense covenants. I address potential endogeneity concerns by using instrumental variable analysis, and by showing that innovation increases significantly after new public debt offerings and seasoned equity offerings, but does not change after new bank loans.

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About this eJournal

This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

Editors: G. William Schwert, University of Rochester, and Rene M. Stulz, Ohio State University (OSU)

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

MICHAEL C. JENSEN
Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
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Advisory Board

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
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

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 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