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Introduction
My primary areas of research are: (1) evaluating the risks created by universal banks and other systemically important financial institutions, as well as stablecoins and other cryptocurrencies, (2) determining the optimal regulatory responses to those risks, (3) studying the importance of separating banking from commerce, (4) identifying problems created by regulatory capture, and (5) examining the destructive consequences of federal preemption of state consumer protection laws.
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Publications
Publications (83)
On February 4, 2025, Senators Bill Hagerty, Tim Scott, Cynthia Lummis, and Kirsten Gillibrand introduced a bill that would create a dangerously weak and deeply flawed regulatory regime for stablecoins. Their bill (the “Hagerty bill”) would allow stablecoins to be offered to the public without the protections provided by federal deposit insurance an...
In Cantero v. Bank of America, N.A., 602 U.S. 205 (2024), the Supreme Court vacated and remanded a decision of the Second Circuit Court of Appeals. Bank of America argued that the National Bank Act preempts New York General Obligation Law (NYGOL) § 5-601, thereby exempting the bank from any duty to comply with § 5-601. The Second Circuit agreed wit...
On April 17, 2024, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced a bill entitled “The Lummis-Gillibrand Payment Stablecoin Act.” The bill’s declared purpose is to create “a clear regulatory framework for payment stablecoins that will protect consumers, enable innovation and promote U.S. dollar dominance while preserving th...
Patrick Corrigan’s recent article highlights the abuses of securitization by universal banks during the subprime lending boom that led to the Global Financial Crisis of 2007–09 (GFC). Professor Corrigan’s article focuses on what Zoltan Pozsar and other researchers have called “internal” shadow banking—namely, the origination and securitization of h...
In Cantero v. Bank of America, N.A., 144 S. Ct. 1290 (2024), the Supreme Court vacated and remanded a decision of the Second Circuit Court of Appeals. Bank of America argued that the National Bank Act (NBA) preempted New York General Obligation Law (NYGOL) § 5-601, thereby exempting the bank from any duty to comply with the New York statute. The Se...
The crypto boom and crash of 2020–22 demonstrated that (i) cryptocurrencies with fluctuating values are extremely risky and highly volatile assets and (ii) cryptocurrencies known as “stablecoins” are vulnerable to systemic runs whenever there are substantial doubts about the adequacy of reserves backing those stablecoins. Crypto firms amplified the...
The crypto boom and crash of 2020-22 demonstrated that (i) cryptocurrencies with fluctuating values are extremely risky and highly volatile assets, and (ii) cryptocurrencies known as “stablecoins” are vulnerable to systemic runs whenever there are serious doubts about the adequacy of reserves backing those stablecoins. Crypto firms amplified the cr...
On September 15, 2022, the Second Circuit Court of Appeals issued its decision in Cantero v. Bank of America, N.A. Cantero held that the National Bank Act (NBA) preempted the application to national banks of a New York law requiring home mortgage lenders to pay a minimum rate of interest on mortgage escrow accounts. The Second Circuit declared that...
This comment letter responds to the U.S. Treasury Department’s request for public comments on President Biden’s Executive Order No. 14067, “Ensuring Responsible Development of Digital Assets” (Mar. 9, 2022). This letter contends that (1) digital stablecoins currently pose significant risks to U.S. financial markets and investors, (2) stablecoins wi...
This essay was published as part of a law review symposium that evaluated my work on the regulation of large, complex financial institutions. Part I of my essay discusses the other articles published in the symposium issue and describes their relationship to my own work. Part II analyzes the global financial crisis that began in March 2020, followi...
In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report evaluating possible regulatory strategies for responding to the risks posed by stablecoins. This article strongly supports three approaches discussed in PWG’s report. First, the Securities and Exchange Commission (SEC) should use its available powers to regul...
This policy brief examines several failures by the Office of the Comptroller of the Currency (OCC) to comply with the Dodd-Frank Act and other legal authorities governing the scope of preemption for national banks and federal savings associations. The policy brief argues that the OCC should promptly rescind or revise several of its existing rules,...
In January 2020, I completed a book (Taming the Megabanks: Why We Need a New Glass-Steagall Act) analyzing the financial crises that precipitated the Great Depression of the 1930s and the recent Great Recession. My book argued that the world’s financial system was caught in a “global doom loop” at the beginning of 2020. Bailouts and economic stimul...
The pandemic crisis has accelerated the entry of financial technology (“fintech”) firms into the banking industry. Some of the new fintech banks are owned or controlled by commercial enterprises. Affiliations between commercial firms and fintech banks raise fresh concerns about the dangers of mixing banking and commerce. Recent scandals surrounding...
Like the credit boom of the 1920s, the toxic credit bubble of the 2000s precipitated a devastating global financial crisis. The desire to earn quick profits from originating and securitizing subprime loans corrupted the risk management practices of large financial conglomerates and the credit review practices of credit ratings agencies that assigne...
Large commercial banks and their securities affiliates helped to finance an unsustainable credit boom and stock market bubble during the 1920s. Charles Mitchell of National City Bank and Albert Wiggin of Chase National Bank pioneered a new universal banking (“financial department store”) business model for large commercial banks. The rise of univer...
Chapter 1 describes the rise of universal banks in the U.S. during the late nineteenth and early twentieth centuries. Large commercial banks in New York and Chicago entered the securities business in the late nineteenth century by forming alliances with leading investment banks. In 1902, the federal regulator of national banks (the Comptroller of t...
The Great Crash on Wall Street in October 1929 undermined the U.S. economy and led to the Great Depression. National City Bank, Chase National Bank, and other U.S. universal banks eagerly promoted the stock market bubble of the late 1920s. The reputations of those institutions and their leaders plummeted during the Great Crash and its aftermath. Th...
The Glass-Steagall Act created a decentralized financial system composed of three separate and independent financial sectors—commercial banking, securities markets, and insurance. The Bank Holding Company Act of 1956 reinforced Glass-Steagall’s policy of structural separation by prohibiting bank holding companies from engaging in any activities tha...
During the 2000s, universal banks originated and securitized trillions of dollars of toxic subprime loans and sold the resulting debt securities to investors around the world. Governments on both sides of the Atlantic encouraged universal banks to engage in high-risk lending and securitization. Universal banks enjoyed unrivaled influence, and gover...
In March 1933, President Franklin Roosevelt declared a national bank holiday and persuaded Congress to approve emergency measures to revive the U.S. banking system. Those measures included capital infusions from the Reconstruction Finance Corporation and asset-backed loans from the Federal Reserve. National City Bank, Chase National Bank, and other...
A speculative and unstable credit boom occurred in overseas markets during the 1920s, as universal banks and private investment banks competed aggressively to sell more than $12 billion of foreign bonds to U.S. investors. The resulting surge in overseas lending left many governments and private sector borrowers in Central and Eastern Europe and Lat...
Banking crises occurred on both sides of the Atlantic during the Great Depression. Troubled universal banks were at the center of each crisis. The first U.S. banking crisis in late 1930 was caused by the failures of two large financial conglomerates. In May 1931, the collapse of Austria’s biggest universal bank triggered a series of crises that swe...
In 2009, the U.S. and other G20 nations agreed on reforms designed to improve the regulation of systemically important financial institutions and markets. However, those reforms did not change the fundamental structure of the financial system, which continues to be dominated by universal banks and large shadow banks. Those giant institutions are to...
The Fed’s rescue of Bear Stearns and the Treasury Department’s nationalization of Fannie Mae and Freddie Mac in 2008 provoked widespread criticism. Consequently, the Fed and Treasury were very reluctant to approve further bailouts, and they allowed Lehman Brothers to fail in September 2008. Lehman’s collapse triggered a global panic and a meltdown...
A new Glass-Steagall Act would break up universal banks and end the conflicts of interest that prevent universal banks from acting as objective lenders and impartial investment advisers. It would produce a more stable and resilient financial system by reestablishing structural buffers to prevent contagion between the banking system and other financ...
Large banks and their political allies waged a twenty-year campaign to secure legislation that would remove the structural buffers established by the Glass-Steagall and Bank Holding Company Acts. That campaign triumphed in 1999, when Congress passed the Gramm-Leach-Bliley Act (GLBA). GLBA authorized the creation of financial holding companies that...
This book demonstrates that universal banks—which accept deposits, make loans, and engage in securities activities—played central roles in precipitating the Great Depression of the early 1930s and the Great Recession of 2007–09. Universal banks promoted a dangerous credit boom and a hazardous stock market bubble in the U.S. during the 1920s, which...
This blog post was published in The FinReg Blog (hosted by Duke’s Global Financial Markets Center) on September 24, 2020. It provides an overview of my book of the same title, published by Oxford University Press on October 2, 2020.
This book demonstrates that universal banks—which accept deposits, make loans, and engage in securities activities—played central roles in precipitating the Great Depression of the early 1930s and the Great Recession of 2007–09. Universal banks promoted a dangerous credit boom and a hazardous stock market bubble in the U.S. during the 1920s, which...
The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have adopted several recent measures that attempt to confer benefits and privileges of banks on nonbank providers of financial services and commercial firms. The OCC’s and FDIC’s initiatives are unlawful and dangerous because they would allow no...
On March 17, 2020, the Federal Deposit Insurance Corporation (“FDIC”) published a proposed rule (the “Proposed ILC Rule”), which would govern applications for deposit insurance, changes in control, and mergers involving FDIC-insured industrial banks and industrial loan companies (“ILCs”). If adopted, the Proposed ILC Rule would open the door to wid...
Members of the panel discussed the causes of the global financial crisis of 2007-09, the Dodd-Frank Act, the Consumer Financial Protection Bureau, the risks posed by universal banks and shadow banks, the potential advantages and disadvantages of a new Glass-Steagall Act, and emerging risks related to investments in Bitcoin.
The financial crisis of 2007-2009 caused the most severe global economic downturn since the Great Depression. The recent crisis has generated renewed interest in the Glass-Steagall Banking Act of 1933, which Congress adopted in response to the collapse of the U.S. banking system and the freezing of U.S. capital markets during the Great Depression....
Financial regulation after the Dodd-Frank Act has produced a blizzard of acronyms, many of which revolve around the "too big to fail" (TBTF) problem. OLA, OLF, SPOE, and TLAC are new regulatory tools that seek to build a new regime for resolving failures of systemically important financial institutions (SIFIs). The explicit goal of this new regime...
A primary goal of the Dodd-Frank Act is to end “too big to fail” (TBTF) bailouts for systemically important financial institutions (SIFIs) and their creditors. Title II of Dodd-Frank establishes the Orderly Liquidation Authority (OLA), which empowers the Secretary of the Treasury to appoint the Federal Deposit Insurance Corporation (FDIC) as receiv...
Prelude to Glass-Steagall: Abusive Securities Practices by
National City Bank and Chase National Bank During the “Roaring Twenties”
Arthur E. Wilmarth, Jr.
Abstract
From the late 1990s through 2008, the United States experienced the largest boom-and- bust cycle in its securities and housing markets since the “Roaring Twenties” and the Great Dep...
In The Power of Inaction: Bank Bailouts in Comparison, Professor Cornelia Woll asks a question of fundamental importance: “What was the nature of power finance wielded over the fate of the economy and the crisis management in 2008, which affected the lives of so many?”¹ To measure the effective power that the financial industry wielded during the c...
The high-risk business model of large financial conglomerates (frequently called universal banks) was an important cause of the financial crisis. Universal banks rely on cheap funding from deposits and shadow banking liabilities to finance their speculative activities in the capital markets. By combining deposit-taking and short-term borrowing with...
The financial crisis of 2007-2009 and its aftermath have accelerated a powerful consolidation trend in the U.S. banking industry. During the past three decades, the number of community banks and their share of the industry's assets have fallen by more than half, and the largest banks have captured much of the industry's assets. The federal governme...
In this panel discussion, John Dearie, Executive Vice President of the Financial Services Forum, lists several shortcomings of Dodd-Frank, but contends that the banking system is far stronger than it was in 2008. Professor James Barth provides examples of regulators failing to supervise and regulate financial institutions properly and suggests a se...
Experts debate the possible consequences of the Dodd–Frank Act, discussing such topics as banking regulation, derivatives, the Volcker rule, and mortgage reform.
The Dodd–Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010 largely in response to the financial crisis, created the Financial Stability Oversight Council and...
Citigroup has served as the poster child for the elusive promises and manifold pitfalls of universal banking. When Citicorp merged with Travelers to form Citigroup in 1998, Citigroup’s leaders and supporters asserted that the new financial conglomerate would offer unparalleled convenience to its customers through ‘one-stop shopping’ for banking, se...
Although much has been written about innovation in the past several years, not all parts of the innovation lifecycle have been given the same treatment. This volume focuses on the important first step of arranging financing for innovation before it is made, and explores the feedback effect that innovation can have on finance itself.The book brings...
Citigroup has served as the poster child for the elusive promises and manifold pitfalls of universal banking. When Citicorp merged with Travelers to form Citigroup in 1998, Citigroup’s leaders and supporters asserted that the new financial conglomerate would offer unparalleled convenience to its customers through “one-stop shopping” for banking, se...
As the Dodd-Frank Act approaches its third anniversary in mid-2013, federal regulators have missed deadlines for more than 60% of the required implementing rules. The financial industry has undermined Dodd-Frank by lobbying regulators to delay or weaken rules, by suing to overturn completed rules, and by pushing for legislation to freeze agency bud...
This article is based on testimony presented on December 7, 2011, before the Subcommittee on Financial Institutions and Consumer Protection of the Senate Committee on Banking, Housing, and Urban Affairs. The article provides an update and extension of my previous work showing that: (1) the U.S., U.K. and other developed nations provided enormous su...
Congress decided to establish the Consumer Financial Protection Bureau (“CFPB”) after concluding that federal bank regulators had utterly failed to protect consumers during the credit boom leading up to the financial crisis. Because of the prudential regulators’ systemic failures, Congress vested CFPB with sole responsibility and clear accountabili...
Testimony before a subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs describing regulatory reforms needed to control the risks of systemically important financial institutions
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) created the Consumer Financial Protection Bureau (CFPB) and delegated to CFPB the combined rulemaking and enforcement authorities of seven federal agencies that previously were responsible for protecting consumers of financial services. Congress decided to establish a single...
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") was enacted in July 2010. Dodd-Frank's preamble proclaims that one of the statute's primary purposes is to "end 'too big to fail' [and] to protect the American taxpayer by ending bailouts." Dodd-Frank does contain useful reforms, including potentially favorable alterations...
In Cuomo v. Clearing House Ass’n, L.L.C., the United States Supreme Court struck down a regulation issued by the Office of the Comptroller of the Currency (OCC), which barred state officials from filing lawsuits to enforce applicable state laws against national banks. In upholding the New York Attorney General’s authority to seek judicial enforceme...
The ongoing financial crisis has revealed fundamental weaknesses in the regulatory systems of the United States, the United Kingdom and other European nations. In particular, publicly-funded bailouts of major banks have confirmed that “too big to fail” (TBTF) subsidies distort economic incentives and encourage excessive risk-taking by large, comple...
'This volume is a rich collection of essays on the most important financial crisis since the 1930s. Here, the authoritative writers offer trenchant insights on this crisis. Mitchell and Wilmarth are much to be commended for gathering this valuable material in a volume easily accessible to analysts, students, scholars, and anyone alarmed by the pani...
In Cuomo v. Clearing House Ass’n, L.L.C., the United States Supreme Court struck down a regulation issued by the Office of the Comptroller of the Currency (OCC), which barred state officials from filing lawsuits to enforce applicable state laws against national banks. In upholding the New York Attorney General’s authority to seek judicial enforceme...
Since the subprime financial crisis began in mid-2007, banks and insurers around the world have reported $1.1 trillion of losses. Seventeen large universal banks account for more than half of those losses, and nine of them either failed, were nationalized, or were placed on government-funded life support. Central banks and governments in the U.S.,...
During the past three years, a highly-publicized controversy has raged over the question of whether Congress should prohibit acquisitions of industrial loan companies (ILCs) by commercial organizations. The controversy began when Wal-Mart and Home Depot filed applications to acquire ILCs. Those applications triggered strong opposition from a broad...
This comment letter was submitted to the U.S. Treasury Department in connection with that Department's review of proposals for changes in the regulatory structure for financial institutions. The comment letter presents the following policy recommendations: (1) the thrift charter should be eliminated, existing thrifts should be required to convert i...
The re-entry of commercial banks into the securities business transformed U.S. financial markets during the 1990s. The Gramm-Leach-Bliley Act of 1999 (GLBA) removed most of the legal barriers that had separated commercial and investment banking since 1933. GLBA allows commercial banks to become universal banks by affiliating with securities firms a...
During 2005-2006, Wal-Mart, Home Depot, and several other commercial firms applied to the Federal Deposit Insurance Corporation (FDIC) for permission to acquire FDIC-insured industrial loan companies (ILCs). Those applications were opposed by business groups, labor unions, community activists, and members of Congress. In January 2007, the FDIC impo...
This written testimony was presented on April 26, 2007, at a hearing on "Credit Card Practices: Current Consumer and Regulatory Issues," before the Subcommittee on Financial Institutions and Consumer Credit of the U.S. House of Representatives Committee on Financial Services. The testimony discussed the adverse effects on consumers resulting from (...
This essay criticizes OCC v. Spitzer (S.D.N.Y. 2005), a recent federal court decision dealing with the application of state laws to national banks. The court upheld a regulation issued by the Office of the Comptroller of the Currency ("OCC"), the federal agency that supervises national banks. The OCC's regulation preempts the authority of state off...
Commercial banks were leading participants in the U.S. securities markets during the great bull markets of the 1920's and the 1990's. Those stock market booms and the crashes that followed were extraordinary events. Is it merely a coincidence that the two most dramatic stock market booms and crashes in U.S. history occurred during periods when comm...
In January 2004, the Office of the Comptroller of the Currency (OCC) issued new regulations that are intended to preempt a broad range of state laws from applying to national banks and their operating subsidiaries. The OCC's rules declare that state laws are preempted if they obstruct, impair, or condition a national bank's ability to fully exercis...
Over the past three decades, leading industrial nations and many developing countries have deregulated their financial markets. Financial liberalization has produced major benefits, including more efficient intermediation of financial resources, more rapid economic development and faster growth in trade. At the same time, however, many banking cris...
Chief Justice John Marshall's opinion in Marbury v. Madison is generally regarded as the cornerstone of American judicial review. Marshall's opinion in Marbury skillfully invoked the distinctive American concept of popular sovereignty and linked that concept to the written Constitution. Marshall argued that judicial review provided the best means f...
Over the past three decades, leading industrial nations and many developing countries have deregulated their financial markets. Financial liberalization has produced major benefits, including more efficient intermediation of financial resources, more rapid economic development and faster growth in trade. At the same time, however, many banking cris...
The structure of the U.S. financial services industry has changed dramatically during the past quarter century. Large banks, securities firms, and life insurers have pursued aggressive expansion strategies by merging with direct competitors as well as firms in other financial sectors. The Gramm-Leach-Bliley Act of 1999 has encouraged this consolida...
The structure of the U.S. financial services industry has been transformed during the past two decades by the combined forces of new technologies, deregulation and financial innovation. Large banks, securities firms and life insurers have responded to these forces by pursuing a twofold consolidation strategy - acquiring direct competitors within th...
The structure of the U.S. financial services industry has changed dramatically during the past quarter century. Large banks, securities firms, and life insurers have pursued aggressive expansion strategies by merging with direct competitors as well as firms in other financial sectors. The Gramm-Leach-Bliley Act of 1999 has encouraged this consolida...
The structure of the U.S. financial services industry has been transformed during the past two decades by the combined forces of new technologies, deregulation and financial innovation. Large banks, securities firms and life insurers have responded to these forces by pursuing a twofold consolidation strategy - acquiring direct competitors within th...
