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spring 2013 archive

For this semester’s course materials, see the Spring 2013 materials page.

Good luck with the exam!

WEEK 14: April 22-26 On Monday we will finish discussing the derivatives material, and in particular Robert Litan, Futurization of Swaps (Jan. 2013).

Then we will look at bank resolution and in particular living wills. For Monday please read Federal Reserve, FDIC, Resolution Plans Required (Nov. 1, 2011), Barclays Resolution Plan: Public Section (Jul. 2012) and Bank of America Resolution Plan: Public Executive Summary. For Wednesday please read Financial Stability Board, Thematic Review on Resolution Regimes (April 2013) (please note that although this document looks very long it is not necessary to read the details on page 47ff).

On April 15, 2013 the Federal Reserve and FDIC published Guidance for 2013 Resolution Plan Submissions. The guidance identifies a number of obstacles to rapid and orderly resolution that plans are expected to address:

1. Multiple Competing Insolvencies. The risk of discontinuity of Critical Operations, systemic consequences and/or uncertainty of outcome, that could be created under certain circumstances by multiple, competing insolvency proceedings under different insolvency frameworks and/or administered in multiple jurisdictions. If the Plan envisions only one or several Material Entities entering an insolvency regime, the Plan must identify what actions need to be taken and/or structural enhancements made prior to the filing to ensure that the material operating and service entities that are not undergoing restructuring continue to have access to the capital, liquidity, services, data and other assets required to continue operations.
2. Global Cooperation. The risk that actions (or non-actions) of a Covered Company could incent home and host supervisors or resolution authorities or third parties to take actions (or abstain from actions) that could result in ring-fencing of assets or lead to other outcomes that could exacerbate financial instability in the United States and/or loss of franchise value, as well as uncertainty in the markets.
3. Operations and Interconnectedness. The risk that services provided by an affiliate or third party might be interrupted, or financial market utility (“FMU”) access and/or payment and clearing capabilities might be lost; an affiliate or third party might fail to perform service level agreements; the Covered Company might experience interruption or loss of data and IT services; liquidation of a counterparty might negatively impact the Covered Company’s operations; crossdefault provisions might be exercised; a counterparty might exercise contract rejection powers or might be excused from the continued provision of rights which are available to a counterparty under applicable law or by contract.
4. Counterparty Actions. The risk of counterparty actions, including derivative and repo unwinds, of a volume sufficient to create operational challenges for the Covered Company or its FMUs and/or systemic market disruption or financial instability in the United States.
5. Funding and Liquidity. The risk of insufficient liquidity at one or more Material Entities, or in one or more jurisdictions, to maintain Critical Operations, including increased margin requirements, acceleration, termination, inability to roll over short term borrowings, default interest rate obligations, loss of access to alternative sources of credit, and/or additional expenses of restructuring.

April 23: The EU is objecting to US proposals to increase regulatory requirements for large foreign banks and in particular to a proposed requirement for the establishment of Intermediate Holding Companies in the US. Michel Barnier wrote a letter to Ben Bernanke. Here’s an excerpt:

In my opinion, the NPR would seem to represent a radical departure from the existing US policy on consolidated supervision of FBOs, in a way that may frustrate the efforts to ensure a consistent implementation of the Basel II standards against jurisdictions. Indeed, the proposed rules implement a ‘one-size-fits-all’ approach to consolidated supervision of FBOs, preventing US Supervisors from being able, under certain conditions, to rely on the capital provided by their parent and on supervision or regulation on a consolidated basis to which the latter is subject to its home jurisdiction.
The Intermediate Holding Company (IHC) requirement, which is one of the most important innovations of the NPR, depends exclusively on the amount of global and US assets of the institution, completely disregarding whether the latter is subject or not to a consolidated supervision in its home country equivalent to that of the US.
I fully acknowledge that, in certain circumstances, the IHC would provide an effective instrument to enhance the consolidated supervision of the FBOs. However, its indiscriminate application, i.e. without linking it to a proper ex-ante equivalence test, would be against the global efforts towards harmonized rules in the area of prudential standards and cross-border resolution, and may have relevant negative impacts.
Let me in particular draw your attention to two possible unintended consequences deriving from its proposed application. The first refers to its impact on the level playing fields between US domestic banks and the FBOs; the second, to the potential reaction of other jurisdictions…We fear that the NPR could spark a protectionist reaction from other jurisdictions, which could ultimately have a substantial negative impact on the global economic recovery. Indeed, the potential retaliation effects of the new rules could end-up with a fragmentation of global banking markets and regulatory frameworks, with foreseeable consequences in terms of higher concentration of markets and lower levels of competition. These developments would translate into higher costs for banks, particularly those which are internationally active, with negative repercussions on their ability to finance the real economy and economic growth.
This “territorial” approach, in particular if replicated by other regulators, would instead preclude the possibility to resolve a G-SIFI in its entirety in a coordinated manner among different national authorities in accordance with the single point of entry strategy. This is clearly in contradiction with the international standards on cross-border cooperation in bank resolution adopted by the Financial Stability Board and endorsed by the G20.

And a recent report by Oliver Wyman and Morgan Stanley on wholesale and investment banking (accessible here) concludes:

This year’s annual report finds that the extent of the forces driving the fracturing of the global wholesale and investment banking industry is yet to be fully understood. Global wholesale banks and market infrastructure providers face three major forces that will drive change in the industry:
Regulatory balkanization: the report anticipates a 2-3% drag on RoE as a result of the overlapping challenges of multi-jurisdiction, ring-fencing and national subsidiarisation. Diverging national regulatory agendas pose a major risk to the global banking model.
OTC reform is accelerating: overall the report anticipates a less than 1% reduction in RoE for the industry as a result of OTC reform, which is less than the market anticipates. However, while the overall effect will be bounded, the value shifts will be dramatic. Client behavior will be impacted greatly – 45% of investors surveyed expected reduced volumes in OTC swaps in the next two years, and more than 60% of investors have not selected their clearing providers yet. The chronic shortage of collateral will generate new opportunities for some firms.

The EU and US announced recently that they will be negotiating a free trade agreement – financial regulation looks to be an area of difficulty in these negotiations.

WEEK 13: April 15-19 On Monday I will bring the class evaluation forms, and filling these out will reduce the length of our class. We will begin with the rest of International Finance 7: Derivatives. For Monday please also read Elisse Walter, Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground (Apr. 6, 2013).

For Wednesday please read International Finance 8: Derivatives Part 2 and Robert Litan, Futurization of Swaps (Jan. 2013).

April 15: For Wednesday please also read Andrew Haldane, Turning the Red Tape Tide (Apr. 10, 2013).

WEEK 12: April 8-12 For this week I am assigning the following materials: International Finance 7: Derivatives and Clifford Chance & ISDA Regulation of OTC Derivatives Markets: A Comparison of EU and US Initiatives (Sep. 2012). I think that the second document can help us navigate some of the complexities of the two regulatory regimes. At page 12 of the first document I ask you to read the second. So, for Monday please read pages 1-12 of International Finance 7 and the Clifford Chance ISDA document. For Wednesday please read the rest of International Finance 7.

Have a good weekend.

The other day, Mario Draghi, President of the ECB, commented on Cyprus at a press conference:

The ECB had presented a proposal that did not foresee any bail-in of insured depositors. And let me also tell you that this was exactly the same for all the other proposals – the proposals by the Commission and the IMF had exactly the same feature. Then there were prolonged negotiations with the Cypriot authorities, represented at that meeting, the outcome of which was what you know, namely a levy also on insured depositors. That was not smart, to say the least, and it was quickly corrected in a Eurogroup teleconference on the next day. But that is what is past…. let me stress that Cyprus is not a template! I have not had chance to talk to the President of the Eurogroup, but I am absolutely sure that he has been misunderstood. After all, the bail-out of the Dutch bank SNS REAAL, which involved the bail-in of only shareholders and junior debtors to the tune of €4 billion, had been agreed only a few days earlier. And that is no template either.
Let me now share with you some of the lessons that have been learnt from this experience. First, the entering into force and implementation of the Single Supervisory Mechanism (SSM) is absolutely essential. There is no better way to prevent such crises than to shed light on the situation of the national banking systems through the sort of international oversight that would be provided by the SSM. This applies to Ireland, Spain, Greece and now Cyprus. Any delay on this front is therefore extremely disappointing.
Second, I think we should also ask the question what makes a bail-in a problem? A bail-in in itself is not a problem: it is the lack of ex ante rules known to all parties and the lack of capital buffers or other “bail-inable” assets that may make a bail-in a disorderly event. The existence of buffers of “bail-inable” assets is therefore essential. In the case of Cyprus, one peculiarity was the fact that these assets were actually quite limited by comparison with the size of the banks’ assets. Furthermore, the absence of ex ante rules gives the impression of an ad hoc approach in such situations, which is unavoidable in the absence of rules because there are differences in size – in the sense that Spain is not Cyprus – and differences in time – in the sense that the events in Ireland and Spain took place at completely different times. There is thus a need for rules. The European Commission is the one that writes the rules, no one else. A draft directive is now under discussion in the European Council and the European Parliament that specifies a pecking order of the categories of asset holders that could be bailed-in. In this context, we would really like to see these rules enter into force, not in 2018 or 2019 as is envisaged, but much earlier, for example in 2015.
Finally, there is an urgent need for a European framework for the resolution, restructuring and recapitalisation of the banking system

April 9: Elisse Walter of the SEC gave a speech over the weekend on the regulation of derivatives that has an interesting analysis of the cross-border issues, and I think we should read it – I’ll assign it for next week. Meanwhile, on the reasons for the rules this is what she said:

As most of you know, following the financial crisis there was a new focus placed on the regulation of OTC derivatives – and for good reason. The experiences of companies like AIG highlighted how the default – or even the potential default – of a single party involved in a series of derivatives transactions could create widespread instability.
We all saw that it didn’t matter whether the counterparty or trading desk was here or overseas, or whether the contract was executed in Miami or Milan. What mattered was that the potential spillover ultimately limited the willingness of market participants worldwide to extend credit.

WEEK 11: April 1-5 On April Fool’s Day (!) we will continue with the rest of the materials on asset freezing and money laundering. We will begin with the Panel of Experts Report on the Iran Sanctions and then look at the material on the two Kadi cases in the EU and the US in International Finance 6: Asset Freezes. The cases give some insight into the legal rules relating to asset freezes in the EU and the US and the issues of balancing the rights of designated individuals against the need to prevent terrorism. I think we probably won’t be able to cover more material than this on Monday so I am going to assign the material relating to Standard Chartered for Wednesday: this Cease and Desist Order relating to Standard Chartered and this Settlement Agreement relating to Standard Chartered. That is not enough material for one class, however, so we will look at some material on compliance. Please read this MoneyGram, Latin America and the Caribbean Anti-Money Laundering Compliance Guide (2008) and SIFMA, The Evolving Role of Compliance (March 2013).

I am putting together some material on derivatives for the week after next.

Have a good weekend.

April 3: From the DOJ’s announcement of a Deferred Prosecution Agreement with Moneygram in November 2012 (pursuant to which Moneygram agreed to pay $100m, improve compliance and retain a corporate monitor):

The scams – which generally targeted the elderly and other vulnerable groups – included posing as victims’ relatives in urgent need of money and falsely promising victims large cash prizes, various high-ticket items for sale over the Internet at deeply discounted prices or employment opportunities as “secret shoppers.” In each case, the perpetrators required the victims to send them funds through MoneyGram’s money transfer system.
Despite thousands of complaints by customers who were victims of fraud, MoneyGram failed to terminate agents that it knew were involved in scams. As early as 2003, MoneyGram’s fraud department would identify specific MoneyGram agents believed to be involved in fraud schemes and recommended termination of those agents to senior management. These termination recommendations were rarely accepted because they were not approved by executives in the sales department and, as a result, fraudulent activity grew from 1,575 reported instances of fraud by customers in the United States and Canada in 2004 to 19,614 reported instances in 2008. Cumulatively, from 2004 through 2009, MoneyGram customers reported instances of fraud totaling at least $100 million.

Alex Lewis – March 31, 2013: For those of you that haven’t seen this yet, an interesting result in Cyprus:

WEEK 10: March 25-29 On Monday we will discuss the questions at the beginning of International Finance 5: Libor.
For Wednesday please read Financial Action Task Force (FATF), International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (February 2012); International Finance 6: Asset Freezes; this Cease and Desist Order relating to Standard Chartered and this Settlement Agreement relating to Standard Chartered.

Realistically we won’t be able to cover all of the original assignment for tomorrow in one class so I am amending tomorrow’s assignment to the FATF standards and the first 8 pages of International Finance 6: Asset Freezes. We will cover the rest of this material next Monday.

WEEK 9: Mar. 18-22 I hope you are enjoying the break. On Monday we will continue discussing International Finance 4: Eurodollar Deposits. We will begin with the idea of the split proper law, consider the way the judge analyses the case and its implications and focus briefly on payment systems. For Wednesday please read International Finance 5: Libor. I think there is more in this packet than we can discuss in one class. In particular the materials which discuss how regulators and transnational standard-setters are thinking about the role of regulation with respect to benchmarks and indices raise some interesting issues.

March 18: Two news stories:
1. The Eurozone announced conditions for financial support of Cyprus, which the IMF approved. Depositors in banks in Cyprus will bear part of the cost of the bailout:

The Eurogroup further welcomes the Cypriot authorities’ commitment to take further measures mobilising internal resources, in order to limit the size of the financial assistance linked to the adjustment programme. These measures include the introduction of an upfront one-off stability levy applicable to resident and non-resident depositors. Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

Banks in Cyprus are currently closed. And people are demonstrating.

2. Last week, the US Senate’s Permanent Sub-Committee on Investigations published a report on JP Morgan’s London Whale, and held a hearing. You are not reuired to read the report, I include a link in case you are interested. You might want to read this article on the hearing. These materials raise some questions relating to our discussions about bank regulation. JP Morgan failed to provide required disclosures to its regulators for a period:

One episode emerged as emblematic: for a brief period in 2011, regulators stopped receiving profit and loss reports about the investment bank. Mr. Dimon, the executives explained, had ordered the information halted because of broad security concerns.
Senator John McCain, Republican of Arizona, challenged that decision. “Do we live in a world,” he asked, where “we just decide, well, because we’re concerned about something, we’re not going to comply with regulations?”

And the hearings also focused on JP Morgan’s adjustments to its internal models:

Mr. Levin pushed Mr. Cavanagh to admit that the bank had altered its method for pricing trades to minimize losses. Mr. Cavanagh stood firm, arguing that the valuations were fair.
But Mr. Levin persisted, asking, “How do you possibly justify your process?” Was it a “coincidence,” he asked, that the models shifted just as losses on the trades were ballooning? At one point, he reminded Mr. Cavanagh that he was under oath.
He excoriated Peter Weiland, who used to be in charge of market risk for the chief investment unit, for censuring a JPMorgan analyst over an e-mail that outlined strategies for tweaking risk modeling. Mr. Levin pressed Mr. Weiland on his resistance to using e-mail, suggesting that the executive was trying to avoid creating a paper trail.
“Why hide it?” Mr. Levin asked. If JPMorgan’s dealings were appropriate, why shy away “from putting it in writing?”
Mr. Weiland responded that his objective was to prevent anyone from “misconstruing” the bank’s intentions.

WEEK 7: March 4-8 On Monday we will discuss capital adequacy (the end of International Finance 3: Cross Border Financial Regulation; Basel III Summary; Basel Liquidity Coverage Ratio (Jan. 2013) (and Press Release)).
Please also read this Increased Costs Clause.

For Wednesday please read International Finance 4: Eurodollar Deposits.

Feb. 27: The OCC’s Dodd-Frank Act Implementation measure which addresses pre-emption (under s 1044 of the Act) is available at 76 Fed Reg 43549 (Jul. 21, 2011). I am providing the link, not because you are expected to read this material, but in case you are interested.

March 4: You can find highlights of Bank of America’s financial information, showing capital ratios here, and more recent regulatory capital information here.

The EU moved closer to implementation of Basel III this week:

The Economic and Financial Affairs Council on 5 March 2013 broadly endorsed the outcome of the most recent political trilogue of 27 February 2013 with the European Parliament on stricter capital requirements for banks (“CRD 4” package).

The Increased Costs Clause refers to a “Change in Law.” The loan agreement says that this:

means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.

1. Pascal Genoud – February 27, 2013 This might be of interest for today’s discussion: http://www.eba.europa.eu/News–Communications/Year/2013/EBA-interim-report-on-the-consistency-of-risk-weig.aspx
2. Bradley – February 27, 2013 Thank you. Clearly the issues raised in the document are relevant to what we are studying right now: both in terms of capital adequacy and in terms of the more general issue of how easy or difficult it is to achieve real harmonization.
3. Joshua Stern – March 6, 2013

WEEK 6: February 25-March 1: At the end of the last class I asked you to consider the content of the IOSCO Principles and Basel Core Principles. In both cases the organizations have developed more detailed standards than those reflected in the principles you have read. However, the IMF’s FSAP program involves assessing the extent to which IMF members comply with these principles. If you are interested you could look at the FSAP assessment of Australia’s compliance with the IOSCO Principles from November 2012 (this is not required reading). The 153 page report concludes that there is a high level of compliance with the principles although there are some concerns. The principles are drafted in general terms but the way in which the FSAP assessments are carried out suggests that the IMF interprets the principles to have more content than one might expect. For example the IOSCO Principles state that “The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.” The Australia FSAP report states:

ASIC has the primary responsibility for the regulation of securities markets and entities active on them in Australia. In some areas it shares the responsibilities with APRA, the RBA and ASX. Cooperation is organized through the CFR and bilaterally, but the division of responsibilities for the prudential supervision of AFSL holders has created a complex supervisory structure. The extent of the powers of the responsible Minister remains a concern, even though they do not generally include decisionmaking on day-to-day technical matters. The independence and sufficiency of resources of ASIC are hampered by the flattening of its overall operating funding over the last three years and a not insignificant dependence on non-core funding. ASIC has a wide set of powers, in the use of which it is accountable. It has focused on its ability to identify systemic risks and address issues arising from products and activities falling outside the regulatory perimeter.

Read over both sets of principles again. Then on Monday we will begin by looking at s 113 of the Dodd Frank Act in International Finance 3: Cross Border Financial Regulation at page 30. Please read the rest of this materials packet for next week and look at this Basel III Summary and the Basel Liquidity Coverage Ratio (Jan. 2013) (and Press Release).

Consider these questions for Monday:
How do the provisions of the US International Banking Act in the materials address issues in the Basel Core Principles?
The Federal Reserve’s NPR from December 2012 refers to the flexibility the US has allowed to foreign financial institutions. Why is this? And how much does this seem to have changed?
Are banks special?
Why does the US have a dual banking system? Does it really have a dual banking system?

On Wednesday we will look at the material on the Basel Capital Adequacy regime (pp. 77 ff of the materials packet, the summary table and the liquidity coverage ratio documents).

Feb. 27: The OCC’s Dodd-Frank Act Implementation measure which addresses pre-emption (under s 1044 of the Act) is available at 76 Fed Reg 43549 (Jul. 21, 2011). I am providing the link, not because you are expected to read this material, but in case you are interested.

WEEK 5: February 18-22, 2013 On Monday we will look at the materials you have had so far on the EU (the financial and sovereign debt crisis and the EU’s responses): From Global Financial Crisis to Sovereign Debt Crisis and Beyond: What Lies Ahead for the European Monetary Union?; EU Collective Action Clauses; EU CACs supplemental provisions; and EU CAC Explanatory Note.

I would like to examine how these CACs differ from the ones we looked at in the last class.

For Monday please also read this IMF Staff Discussion Note, A Banking Union for the Euro Area (Feb. 2013).

Then for Wednesday please read pages 1-49 of International Finance 3: Cross Border Financial Regulation.

Have a good weekend.

February 19th: Here is a list of Global Systemically Important Financial Institutions produced by the FSB: GSIFI List.
The list shows banks identified by the FSB in November 2011 and 2012.

In 2011 the FSB wrote:

SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances… Addressing the “too-big-to-fail” problem requires a multipronged and integrated set of policies. Accordingly, the policy measures we have agreed comprise: i) A new international standard, as a point of reference for reform of our national resolution regimes, setting out the responsibilities, instruments and powers that all national resolution regimes should have to enable authorities to resolve failing financial firms in an orderly manner and without exposing the taxpayer to the risk of loss (‘FSB Key Attributes of Effective Resolution Regimes’); ii) Requirements for resolvability assessments and for recovery and resolution planning for global systemically important financial institutions (G-SIFIs), and for the development of institution-specific cross-border cooperation agreements so that home and host authorities of G-SIFIs are better prepared for dealing with crises and have clarity on how to cooperate in a crisis; iii) Requirements for banks determined to be globally systemically important to have additional loss absorption capacity tailored to the impact of their default, rising from 1% to 2.5% of risk-weighted assets (with an empty bucket of 3.5% to discourage further systemicness), to be met with common equity;
iv) More intensive and effective supervision of all SIFIs, including through stronger supervisory mandates, resources and powers, and higher supervisory expectations for risk management functions, data aggregation capabilities, risk governance and internal controls.

The International Association of Insurance Supervisors plans to publish its initial list of Globally Systemic Important Insurers in summer 2013.

February 20th: The EU announced:

The Commission will establish an Expert Group to deepen the analysis on the possible merits, risks, requirements and obstacles of partial substitution of national issuance of debt through joint issuance in the form of a redemption fund and eurobills. The Group will be tasked to thoroughly assess, what could be their features in terms of legal provisions, financial architecture and the necessary complementary economic and budgetary framework. Democratic accountability will be a central issue to be considered.


Following the adoption of the Single Supervisory Mechanism, the presentation of a proposal for a Single Resolution Mechanism, which would be in charge of the restructuring and resolution of banks within the Member States participating in the Banking Union.. Before the end of 2013, the presentation of a proposal under Article 138(2) TFEU to establish a unified position to achieve an observer status of the euro area in the IMF executive board, and subsequently for a single seat.

WEEK 4: February 11-15 For next week please finish reading the International Finance 2: Sovereign Debt materials packet – we will begin with sovereign immunity on Monday. For next week please also read my article From Global Financial Crisis to Sovereign Debt Crisis and Beyond: What Lies Ahead for the European Monetary Union? (forthcoming Trannsnat’l L & Contemp. Probs) which looks at the European sovereign debt problems and some of the things the EU has done to address them. Then the EU provides some more examples of CACs: EU Collective Action Clauses; EU CACs supplemental provisions; and EU CAC Explanatory Note which I would also like you to read.

Have a good rest of the week and weekend.

February 12: Jamaica announces a debt swap. The BBC story states:

About 55% of government spending goes towards paying the nation’s debt, while 25% goes on wages. That leaves just 20% for everything else – including education, security and health… The administration will offer a swap of higher-interest debt for lower-cost debt and will require “significant sacrifices” from financial institutions and domestic bond holders.

The Head of the IMF Mission to Jamaica, Jan Kees Martijn, said:

The mission welcomes the debt exchange announced by the Jamaican authorities for their domestic debt, which is an important element aimed at helping to put public debt firmly on a downward trajectory, reduce the stock of debt, and provide fiscal space for other needed government initiatives. In that regard, a successful debt exchange will require high participation from creditors to help secure financing assurances for a Fund-supported program.

A small number of jurisdictions have enacted legislation to block the ability of vulture funds to sue. For example, the UK enacted the Debt Relief (Developing Countries) Act 2010 (Explanatory Notes) initially for on year, but the Act was later (made permanent). But the UK legislation is tied to the Heavily Indebted Poor Countries Initiative (here is a link to the IMF factsheet), and most of the countries to which this initiative relates are in Africa. Jamaica is not a HIPC country.

Here is a handout outlining the features of the CACs in the sovereign debt packet.

Foreign Policy Journal has an article on The Impending Japanese Sovereign Debt Crisis:

.. Japan’s ..current debt levels..are running at approximately 230% of GDP. This debt has been financed through the issuance of low interest rate government bonds (the Japanese 10 year note currently carries an interest rate of less then 1%, the lowest in the world). The primary market for these bonds has been the domestic consumer, most especially Japanese households. Today, approximately 93% of Japanese government debt is domestically held.
At issue is the fact that there are two factors that are likely to lead to a decline in domestic consumption of government debt. First Japanese households, which have historically had a very high savings rate, are now saving less then 2% of their income; as savings rates decline, so to will the ability of domestic consumers to buy government debt. Second, the Japanese current account surplus has also dwindled from approximately 6% of GDP in 2007 to less then 1%. The current account surplus has been essential for the Japanese government, as it results in new money entering the economy. The new money, when levered in the banking system, has been key to maintaining high rates of domestic consumption of government debt.
There is also the greying of the Japanese population to contend with, which will exacerbate government debt problems. The share of the Japanese population that is over retirement age of 65 has more than doubled over the past two decades. As this share grows not only will it consume a larger portion of the Japanese governments expenditures in the form of social programs, but those over 65 will also contribute less in taxes to government coffers.

February 14: The U.S. Department of the Treasury has announced the signing of a bilateral agreement with Switzerland to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). If you are interested in the proposal for a financial transaction tax in the EU you can find the proposal here. These materials are not required reading for the class.

WEEK 3: February 4-8, 2013

This week we will be working with the International Finance 2: Sovereign Debt materials packet. We will begin on Monday with the vulture fund cases we started to discuss on Wednesday. In particular we will focus on the idea of assignment, and the liberal approach to assignment demonstrated in the cases. Please read to page 59 for Monday and to page 110 for Wednesday.

February 4: The IMF has censured Argentina:

The IMF’s Executive Board met on February 1, 2013 to consider the Managing Director’s report on Argentina’s progress in implementing remedial measures to address the quality of the official data reported to the Fund for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP).
The Executive Board found that Argentina’s progress in implementing the remedial measures since the September 17, 2012 Board meeting … has not been sufficient. As a result, the Fund has issued a declaration of censure against Argentina in connection with its breach of obligation to the Fund under the Articles of Agreement.

Here is a link to the Bloomberg story (stating that Argentina is “the first nation to be censured by the IMF” and that the censure “takes the country a step closer to sanctions that include expulsion.”

An organization called American Task Force Argentina organizes publicity and lobbies on the Argentine debt issues (it is described in this article as a lobbying group Elliott funds).

WEEK 2: January 28-31, 2013

For Monday’s class please finish reading the first materials packet: International Finance 1: Securities Litigation and Transnational Investment in Securities

For Wednesday please read to page 45 of the second materials packet: International Finance 2: Sovereign Debt

In Spring 2013 the course will be organized to focus on specific issues of policy in transnational financial regulation. The topics for the class will be: 1. Securities Litigation and Transnational Investment in Securities; 2. Sovereign Debt; 3. Libor; 4. Shadow Banking, Too Big to Fail, Bank Resolution; 5.Derivatives. The readings for the class will tend to be policy documents (such as proposed regulations, consultation documents, responses to consultations, reviews of policy by legislative bodies, publications of transnational standard-setters and international financial institutions) rather than court decisions, although we will read some court decisions.

As background to some of the material we will be studying have a look at this video by Jonathan Jarvis. For our purposes it makes sense to understand that some of the securities backed by US mortgage loans were sold outside the US, and that US financial institutions are often involved in business outside the US. Money and risk cross territorial borders.

First class assignment for January 23, 2013:

Please read to page 37 of the first chapter of the course materials:

International Finance 1: Securities Litigation and Transnational Investment in Securities

Here are the Class Policies for International Finance Spring 2013

Here is a preliminary list of possible paper topics: Paper Topics (Jan. 23, 2013)


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