Table of Contents

Is Exposure to Complex Tax Issues Associated with Better Audit Quality of Income Tax Accounts?

Nathan C. Goldman, University of Texas at Dallas - Naveen Jindal School of Management
M. Kathleen Harris, Washington State University - Department of Accounting
Thomas C. Omer, University of Nebraska at Lincoln - School of Accountancy

Counterparty Trading Limits Revisited: CSAs, IM, SwapAgent®, from PFE to PFL

Chris Kenyon, Lloyds Banking Group
Mourad Berrahoui, Lloyds Banking Group
Benjamin Poncet, Lloyds Banking Group

In Unchartered Territory - Banking Supervision Meets Fintech

Philipp Maume, TUM School of Management

Do Fire Sales Create Externalities?

Sergey Chernenko, Purdue University - Department of Management
Adi Sunderam, Harvard Business School


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"Is Exposure to Complex Tax Issues Associated with Better Audit Quality of Income Tax Accounts?" Free Download

NATHAN C. GOLDMAN, University of Texas at Dallas - Naveen Jindal School of Management
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M. KATHLEEN HARRIS, Washington State University - Department of Accounting
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THOMAS C. OMER, University of Nebraska at Lincoln - School of Accountancy
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Anecdotal evidence suggests that audit offices with increased exposure to complex tax issues invest more in training and have more experience auditing the income tax accounts. We posit this exposure generates task-specific expertise in income taxation and lowers the likelihood of a tax misstatement. Using a post-Sarbanes-Oxley sample of Big 4 audit offices, we find evidence consistent with these expectations. We also find evidence of a learning effect among these audit offices, demonstrated by a decreased likelihood of a future tax misstatement following the disclosure of a tax restatement. Additionally, we only observe the effect of exposure to complex tax issues among audit offices that do not provide APTS, thereby suggesting that audit offices can substitute for APTS provision with exposure to complex tax issues. Our findings contribute to the literature examining task-specific expertise and increase our understanding of the dynamics of audit team performance when auditing income tax accounts.

"Counterparty Trading Limits Revisited: CSAs, IM, SwapAgent®, from PFE to PFL" Free Download

CHRIS KENYON, Lloyds Banking Group
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MOURAD BERRAHOUI, Lloyds Banking Group
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BENJAMIN PONCET, Lloyds Banking Group
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The utility of Potential Future Exposure (PFE) for counterparty trading limits is being challenged by new market developments, notably widespread regulatory Initial Margin (using 99% 10-day exposure), and netting of trade and collateral flows. However PFE has pre-existing challenges w.r.t. portfolios/distributions, collateralization, netting set seniority, and overlaps with CVA. We introduce Potential Future Loss (PFL) which combines expected shortfall (ES) and loss given default (LGD) as a replacement for PFE. With two additional variants Adjusted PFL (aPFL) and Protected Adjusted PFL (paPFL) these deal with both new and pre-existing challenges. We provide a theoretical background and numerical examples.

"In Unchartered Territory - Banking Supervision Meets Fintech" Free Download
Forthcoming in Corporate Finance 2018

PHILIPP MAUME, TUM School of Management
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There is uncertainty among financial markets participants as to how to apply the traditional banking regulation to fintechs. This article focuses on fintech regulation through the lens of banking supervision. It discusses the trend towards co-operation between banks and fintechs, the applicable legal framework, potential banking license requirements and the obstacles of outsourcing of banking functions to fintechs under the current framework.

This article lays out the current German legal framework. However, in the EU credit institutions and financial service providers, including outsourcing, are regulated under EU laws, most notably Directive 2014/65/EU (‘MiFiD2’), Directive 2013/36/EU (‘CRD IV’) and Regulation (EU) 575/2013 (‘CRR’). Thus, the rules and principles discussed in this article apply in other EU jurisdictions accordingly.

"Do Fire Sales Create Externalities?" 

SERGEY CHERNENKO, Purdue University - Department of Management
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ADI SUNDERAM, Harvard Business School
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We develop three novel measures of how much of the price impact of their trading different mutual funds internalize. We show that mutual funds that internalize more of their price impact hold larger cash buffers and use these buffers more aggressively to accommodate inflows and outflows. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results suggest that there are meaningful fire sale externalities in the mutual fund industry, and that a planner coordinating among funds would choose different liquidity management policies.

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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
SSRN, Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI), Harvard University - Accounting & Control Unit
Email: mjensen@hbs.edu

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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, SSRN, 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), Harvard University - Accounting & Control Unit

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