Global Regulatory Standards and Secured Transactions Law Reforms: At the Crossroad between Access to Credit and Financial Stability
56 Pages Posted: 13 Apr 2018
Date Written: March 30, 2018
Globally harmonized prudential regulation and internationally driven secured transactions law reforms chart the normative premises sustaining credit-based economies. Oscillating between the need of expanding credit creation to promote economic growth and the urgency of controlling the excessive accumulation of debt, modern economies depend on private law rules and regulatory provisions that originate in different fora of the international lawmaking arena. Under the auspices and guidance of international organizations concerned with the alleviation of poverty, a growing number of jurisdictions across the globe have embarked – or are embarking – upon substantial legal reforms to facilitate credit expansion and financial inclusion through the establishment of proprietary entitlements, known as “security interests” or “security rights,” over personal property. In essence, secured transactions law reforms aim at equipping creditors and debtors with legal tools that effectively reduce credit risk by placing secured creditors in a priority position vis-à-vis unsecured creditors and competing claimants. Prudential regulation, through international regulatory standards, sets forth the amount of capital that – relative to the total investments and in proportion to the risks acquired – regulated deposit-taking institutions, for simplicity banks, must not fund with borrowed money. The overarching aim is to ensure that banks maintain sufficient funds to insulate depositors from unexpected losses and promote financial stability by controlling the level of risk taken by banks. These branches of law intersect when banks secure the repayment of loans with collateral. Yet, from a regulatory perspective, not all security rights are considered to offer sufficient protection against credit risk.
An inconsistency, if not a fully-fledged paradox, surfaces in the international and national legal frameworks governing credit: core legal devices designed by private law rules to reduce credit risk may be considered, under capital requirements, inapt to curb credit risk and, thus, equated to unsecured credit. At first blush, the different treatments of collateral may appear symptomatic of a clash between broad policy objectives, namely, economic growth (stimulated through access to credit) and financial stability. A closer examination, however, reveals a tension that is more profound than a mere balancing exercise between two policy objectives that, in fact, should be approached as complementary, rather than in contrast.
The main argument of this Article is that dissonances between secured transactions law and capital requirements stem from their different ethoi and hinder both access to credit and financial stability worldwide. To sustain this argument and advance the debate in both fields of law, this Article, first, isolates the rationales and the operational logics of secured transactions law and capital requirements. Subsequently, it examines the regulatory treatment of security rights in personal property with primary reference to international legal and regulatory standards. The provisions enshrined in the UNCITRAL and the EBRD model laws are measured against the requisites that collateralized transactions must satisfy in order to benefit from discounted capital charges, pursuant to the Second Basel Capital Accord (Basel II) and the finalized Third Basel Capital Accord (Basel III). Given the different levels of implementation of these standards at the national level, different methodological approaches have been deployed. Hence, the international law outlook is enriched by a comparative law perspective. Furthermore, the analytical tools offered by regulatory theory complements the analysis of private law norms. Secured transactions laws of selected jurisdictions – belonging to civil law and common law legal families – are compared. Specific attention is given to legal and regulatory frameworks of the European Union and its Member States. In the EU, in fact, secured transactions laws are disharmonized while capital requirements are harmonized and largely based on Basel II that is, in turn, applied to any credit institution operating in the European single market through the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR). This systematic approach allows us to identify specific dissonances between secured transactions law and capital requirements. These dissonances affect the terms of a security agreement, the rights and obligations of the parties, the public filing (or registration) regime for security rights and their enforcement. The Article concludes by indicating the policy implications stemming from legal and regulatory dissonances and curtailing the effectiveness of secured transactions law reforms and stimulating the expansion of unregulated markets.
Keywords: Access to Credit, Financial Stability, Secured Transactions, Prudential Regulation, Capital Requirements, Basel 2, Basel 3, Regulatory Capital, Secured Transactions, Law Reforms, UNCITRAL, Credit Risk, Collateral, Security Interests, Security Rights, Credit Institutions, Banking Regulation
JEL Classification: K11, K19, K22, K23, K33, G21, G23, G28, P14, O57
Suggested Citation: Suggested Citation