The Iron Law of Financial Regulation

2021 Wallenberg Lecture 

The Iron Law of Financial Regulation

  • 28 October 2021
  • Online

Public Event

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2021 Wallenberg Lecture 

“The Iron Law of Financial Regulation” 

Delivered by 

Professor Roberta Romano

Sterling Professor of Law, Yale University and ECGI

 

Thursday, 28 October 2021 

Online | 16:00 CEST | 10:00 EDT

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About the Event
 

The 2021 Wallenberg Lecture is taking place on 28 October 2021, online. The lecture, which will be delivered by Prof. Roberta Romano (Yale University and ECGI), will develop on Prof. Romano's earlier lecture series following the global financial crisis, which advocated a serious, comprehensive reassessment of financial regulation after a fixed period. With the benefit of information regarding the impact of regulatory alternatives available at the time of such a reassessment, errors and mismatched solutions that resulted from crisis-driven legislation can be reconsidered and rectified.

The lecture will review the components of what Prof. Romano terms the “iron law of financial regulation” - that following a crisis, legislators will act despite its being an importune time regarding the availability of information regarding a crisis’ causes and corresponding solutions, creating a complex, regulatory ratchet, increasing costs that can have adverse unintended consequences, and then provide preliminary findings regarding the empirical  foundations for the iron law.


Prof. Romano is Sterling Professor of Law at Yale Law School and Director of the Yale Law School Center for the Study of Corporate Law. Her research has focused on state competition for corporate charters, the political economy of takeover regulation, shareholder litigation, institutional investor activism in corporate governance and the regulation of securities markets and financial instruments and institutions. She is a fellow of the American Academy of Arts and Sciences, ECGI Fellow, a research associate of the National Bureau for Economic Research, a past President of the American Law and Economics Association and the Society for Empirical Legal Studies, and a past co-editor of the Journal of Law, Economics and Organization. She is a recipient of numerous awards and honours, including the William & Mary Law School’s Marshall-Wythe Medallion, and is the author of The Genius of American Corporate Law (1993) and The Advantage of Competitive Federalism for Securities Regulation (2002), editor of Foundations of Corporate Law, 2d ed. (2010) and co-editor with Shen Wei, of Financial Regulation After the Global Financial Crisis: US and China Perspectives (2017) (in Chinese).

The lecture will be discussed by Prof. Franklin Allen, Professor of Finance and Economics and Executive Director of the Brevan Howard Centre at Imperial College London, and ECGI Fellow. He was formerly Executive Editor of the Review of Financial Studies and Managing Editor of the Review of Finance.  He is a past President of the American Finance Association, the Western Finance Association, the Society for Financial Studies, the Financial Intermediation Research Society and the Financial Management Association, and a Fellow of the Econometric Society. 


Working Paper Prizes

The Prizes for the best papers in the ECGI Working Paper Series' (Law and Finance) in 2020 will be awarded after the lecture, with a brief presentation of the papers by the authors. The prizes are sponsored by Cleary Gottlieb Steen & Hamilton and The European Corporate Governance Research Foundation

The 2021 ECGI Finance Prize has been awarded to José-Luis Peydró (Imperial College London and CEPR), Andrea Polo (Luiss University, EIEF, CEPR and ECGI), Enrico Sette (Bank of Italy) for their paper on:  Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises” (ECGI Finance Working Paper 713/2020). The prize is kindly sponsored by the European Corporate Governance Research Foundation.

The 2021 Cleary Gottlieb Steen & Hamilton Prize for the Best Paper in the ECGI Law Working Paper Series has been awarded to Dionysia Katelouzou (Kings College London) and Mathias Siems (European University Institute and ECGI) for their paper: The Global Diffusion of Stewardship Codes (ECGI Law Working Paper 526/2020).

Register here: https://bit.ly/3tV0Stn

This event will follow the ECGI General Assembly Meeting taking place on the same day. 

 

Supported by

THURSDAY 28 OCTOBER 2021 (CEST Timezone)

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The Wallenberg Lecture: 'The Iron Law of Financial Regulation'

Time:
16:00h

Speakers

Discussants

17:30
- 18:50

ECGI Working Paper Prize Sessions:

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Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises (Finance Prize)

Time:
17:30h

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

Authors: José-Luis Peydró,  Andrea Polo, Enrico Sette

We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.

Paper: Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

 

Speakers

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The Global Diffusion of Stewardship Codes (Law Prize)

Time:
18:10h

The Global Diffusion of Stewardship Codes

Authors: Dionysia Katelouzou, Mathias Siems

 

In today’s world, the transfer of laws and regulations between different legal systems is commonplace. The global spread of stewardship codes in recent years presents a promising, but yet untested, terrain to explore the diffusion of such norms. This paper aims to fill this gap.

Employing the method of content analysis and using information from 41 stewardship codes enacted between 1991 and 2019, we systematically examine the formal diffusion of these stewardship codes. While we find support for the diffusion story of the UK as a stewardship norm exporter, especially in former British colonies in Asia, we also find evidence of diffusion from transnational initiatives, such as the EFAMA and ICGN codes, as well as regional clusters. We also show that the UK Stewardship Code of 2020 now deviates from these current models; thus, it remains to be seen how far a second round of exportation of the revised UK model into the transnational arena will follow.

Paper: The Global Diffusion of Stewardship Codes

Speakers

18:50

Closing Remarks

Speakers

Presentations

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The Wallenberg Lecture: 'The Iron Law of Financial Regulation'

Time:
16:00h

Speakers

Discussants

Back to all presentations

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises (Finance Prize)

Time:
17:30h

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

Authors: José-Luis Peydró,  Andrea Polo, Enrico Sette

We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.

Paper: Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

 

Speakers

Back to all presentations

The Global Diffusion of Stewardship Codes (Law Prize)

Time:
18:10h

The Global Diffusion of Stewardship Codes

Authors: Dionysia Katelouzou, Mathias Siems

 

In today’s world, the transfer of laws and regulations between different legal systems is commonplace. The global spread of stewardship codes in recent years presents a promising, but yet untested, terrain to explore the diffusion of such norms. This paper aims to fill this gap.

Employing the method of content analysis and using information from 41 stewardship codes enacted between 1991 and 2019, we systematically examine the formal diffusion of these stewardship codes. While we find support for the diffusion story of the UK as a stewardship norm exporter, especially in former British colonies in Asia, we also find evidence of diffusion from transnational initiatives, such as the EFAMA and ICGN codes, as well as regional clusters. We also show that the UK Stewardship Code of 2020 now deviates from these current models; thus, it remains to be seen how far a second round of exportation of the revised UK model into the transnational arena will follow.

Paper: The Global Diffusion of Stewardship Codes

Speakers

Closing Remarks

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Closing Remarks

Time:
18:50h

Speakers