Table of Contents

The Reach and Effectiveness of FDICIA: Internal Controls and Audit Committee Regulation in Banking

Drew Dahl, Federal Reserve Bank of St. Louis
Richard L. Jenson, Utah State University

Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law

Nuri Ersahin, University of Illinois at Urbana-Champaign - Department of Finance
Rustom M. Irani, University of Illinois at Urbana-Champaign - Department of Finance
Katherine Waldock, New York University (NYU) - Leonard N. Stern School of Business

Forward at the Money Forward Implied Volatility and Forward Underlying Move Estimations

Didier Kouokap Youmbi, Bank of England - Prudential Regulation Authority

Bank Regulation, CEO Compensation, and Boards

Julian Kolm, Vienna University of Economics and Business - Department of Finance, Accounting & Statistics
Christian Laux, Vienna University of Economics and Business
Gyongyi Loranth, University of Vienna

The Impact of Central Clearing on Credit Default Swap Spreads - Evidence from the North American and European Corporate Credit Default Swap Market

Andreas Oehler, Bamberg University
Benjamin Hartl, Independent

The Exercise of Anti-Spoofing Authority in U.S. Futures Markets: Policy and Compliance Consequences

James A Overdahl, Delta Strategy Group
Kwon Y. Park, Delta Strategy Group


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"The Reach and Effectiveness of FDICIA: Internal Controls and Audit Committee Regulation in Banking" Free Download

DREW DAHL, Federal Reserve Bank of St. Louis
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RICHARD L. JENSON, Utah State University

Complex and overlapping regulations governing the conduct of audits in the banking industry are dominated by the internal controls and audit committee requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Empirical tests using confidential supervisory data show that banks subject to these requirements under FDICIA are capable of conferring benefits that are useful to regulators in monitoring their financial condition. These benefits, however, are not evident uniformly across time nor across banks that vary by inherent accounting risk.

"Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law" Free Download

NURI ERSAHIN, University of Illinois at Urbana-Champaign - Department of Finance
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RUSTOM M. IRANI, University of Illinois at Urbana-Champaign - Department of Finance
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KATHERINE WALDOCK, New York University (NYU) - Leonard N. Stern School of Business
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We examine entrepreneurial activity following the adoption of fraudulent transfer laws in the U.S. These laws strengthen creditor rights by removing the burden of proof from creditors attempting to claw back funds that were transferred out of failing businesses. These laws are particularly important for entrepreneurs whose personal assets are often commingled with those of the venture. Using establishment-level data from the U.S. Census Bureau, we find significant declines in start-up entry, churning among new entrants, and closures of existing ventures after the passage of these laws. Our findings suggest that strengthening creditor rights can, in some circumstances, impede entrepreneurial activity and slow down the process of creative destruction.

"Forward at the Money Forward Implied Volatility and Forward Underlying Move Estimations" Free Download

DIDIER KOUOKAP YOUMBI, Bank of England - Prudential Regulation Authority
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Ahead of the 23rd June UK referendum on “Brexit�, this note provides a technique for estimating the Forward (at referendum date) At The Money Forward (ATMF) implied volatility for equity or FX Indexes. We provide a closed form formula for the forward underlying expected moves (for short terms maturities) post the referendum date. We provide a closed form formula for the forward underlying expected moves conditional to the adverse event (vote in favour of ’leaving’ the European Union (EU) area) happening. We finally provide a closed form formula for the forward underlying expected moves conditional to the adverse event not happening . More generally the framework here can be used to estimate forward implied volatility and forward asset price moves post a potentially adverse event to come in the future.

"Bank Regulation, CEO Compensation, and Boards" Fee Download
CEPR Discussion Paper No. DP11380

JULIAN KOLM, Vienna University of Economics and Business - Department of Finance, Accounting & Statistics
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CHRISTIAN LAUX, Vienna University of Economics and Business
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GYONGYI LORANTH, University of Vienna
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We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is ineffective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulations. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders' incentives to implement an active board, which reduces the effectiveness of compensation regulation.

"The Impact of Central Clearing on Credit Default Swap Spreads - Evidence from the North American and European Corporate Credit Default Swap Market" 

ANDREAS OEHLER, Bamberg University
Email:
BENJAMIN HARTL, Independent
Email:

We contribute to the emerging debate on the joint dynamics of the markets for Credit Default Swaps (CDSs) and the central clearing functions of Central Counterparties (CCPs) by using a unique dataset of 155 North American and 151 European corporate single name CDSs for the period from late 2009 to early 2014. By applying three different analytical methods, we find that CDS spreads (i.e. spread midpoints) increase around the commencement of central clearing. We argue that the spreads’ increase is due to higher transaction costs and a reduction in counterparty risk, which in turn increases the values of the underlying contracts.

"The Exercise of Anti-Spoofing Authority in U.S. Futures Markets: Policy and Compliance Consequences" 
Futures and Derivatives Law Report, Volume 36, Issue 5, May, 2016

JAMES A OVERDAHL, Delta Strategy Group
Email:
KWON Y. PARK, Delta Strategy Group
Email:

The frequency with which spoofing in U.S. futures markets has been alleged and prosecuted has increased steadily since the Dodd-Frank Act explicitly prohibited this type of conduct in 2010. This increase is expected to continue as market regulators focus on detecting and deterring spoofing conduct. We describe the government’s approach to regulating spoofing, examine recent enforcement cases, and discuss criticisms arising from these regulatory and enforcement actions. Finally, we describe the difficulty authorities face in prosecuting spoofing cases, such as the difficulty in distinguishing between prohibited spoofing conduct and lawful conduct such as market making.

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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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Directors

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)
Email: michael_jensen@ssrn.com

Please contact us at the above addresses with your comments, questions or suggestions for FEN-Sub.

Advisory Board

Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Senior Advisor, Credit and Debt Markets Research Program, New York University (NYU) - Salomon Center, Max L. Heine Emeritus Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor Emeritus, Ross School of Business, University of Michigan

DONALD CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

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 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