Steven L. Schwarcz’s research while affiliated with Duke University and other places

To protect economic stability, post-crisis regulation requires financial institutions to clear and settle most of their derivatives contracts through central counterparties, such as clearinghouses associated with derivatives and commodity exchanges. This Article asks whether regulators should expand the central clearing requirement to non-derivative financial contracts, such as loan agreements. The Article begins by theorizing how and why central clearing can reduce systemic risk. It then examines the theory’s regulatory and economic efficiency implications, first for current requirements to centrally clear derivatives contracts and thereafter for deciding whether to extend those requirements to non-derivative contracts. The inquiry has real practical importance because the aggregate monetary exposure on non-derivative financial contracts — and thus the potential systemic risk that could be triggered by that exposure — greatly exceeds that on derivatives contracts. The inquiry also raises fundamental legal questions as to why (and the extent to which) regulators should tell financial institutions how to control risk, and whether to require the mutualization of risk.

This symposium issue examines securitization a decade after the 2008 financial crisis. Prior to the crisis, securitization was one of America’s dominant means of financing. Many observers, however, blamed securitization for causing the crisis, sparking regulation that arguably has been overly restrictive and, in some cases, even punitive. Where are we now?

Whether or not their fault, nations sometimes borrow at levels that become unsustainable. Until resolved, the resulting debt burden hurts not only those nations but also their citizens, their creditors, and—by posing serious systemic risks to the international financial system—the wider economic community. The existing contractual framework for restructuring sovereign debt is inadequate, often leaving little alternative between a bailout, which is costly and creates moral hazard, and a default, which raises the specter of financial contagion and chaos. Although global organizations, including the United Nations and the International Monetary Fund, have tried to strengthen the sovereign-debt-restructuring framework through treaties, such a multilateral legal approach is highly unlikely to succeed in the near future. This essay argues that a model-law approach should facilitate sovereign debt restructuring much more feasibly than a multilateral approach. Model laws have long been used in cross-border lawmaking, when treaties fail. Unlike a treaty, a model law does not require widespread acceptance for its implementation. In particular, if this essay’s model law were enacted into English law, that alone would enable the fair and consensual restructuring of the immense stock—perhaps a quarter to a third or more of all sovereign debt contracts—of such contracts governed by that law. And because it would achieve, by operation of law, the equivalent of the ideal goal of including aggregate-voting collective action clauses in all sovereign debt contracts, such enactment should ensure the continuing legitimacy and attractiveness of English law as the governing law for future sovereign debt contracts. At the very least, however, this essay should serve to increase a model-law approach’s political feasibility by explaining the approach and its potential benefits and limitations. An incremental approach to developing norms, such as one developed through a model law, has strong precedent in the legal ordering of international relationships.

Corporate governance law does not effectively control risk-taking that could have systemic economic consequences, even though that type of risk-taking led to the global financial crisis and is continuing to increase. Various regulatory responses are designed to control systemic risk-taking by aligning interests; but they attempt to align only managerial and investor interests, constraining managers from engaging their firms in risk-taking ventures that have a negative expected value. That leaves a critical misalignment: because much of the harm from the failure of systemically important firms would be externalized onto other market participants as well as onto ordinary citizens impacted by an economic collapse, such firms can engage in risk-taking ventures with positive expected value to their investors but negative expected value to the public. This article analyzes why, and examines how, financial regulation should help to align those private and public interests.

The current global financial system may not withstand the next global financial crisis. In order to promote the resilience and stability of our global financial system against future shocks and crises, a fundamental reconceptualisation of financial regulation is necessary. This reconceptualisation must begin with a deep understanding of how today's financial markets, regulatory initiatives and laws operate and interact at the global level. This book undertakes a comprehensive analysis of such diverse areas as regulation of financial stability, modes of supply of financial services, market infrastructure, fractional reserve banking, modes of production of global regulatory standards and of the pressing need to reform financial sector ethics and culture. Based on this analysis, Reconceptualising Global Finance and its Regulation proposes realistic reform initiatives, which will be of primary interest to regulatory and banking legal practitioners, policy makers, scholars, research students and think tanks.

Unresolved sovereign debt problems and disruptive litigation are hurting debtor nations and their citizens, as well as their creditors. A default can also pose a serious systemic threat to the international financial system. Yet the existing “contractual” approach to sovereign debt restructuring, including the use of so-called collective action clauses, is insufficient to solve the holdout problem; recent empirical research indeed shows a drastic rise in sovereign debt litigation by holdout creditors. And the political economy of treaty-making makes a multilateral “statutory” approach highly unlikely to succeed in the near future. This article, prepared at the invitation of the United Nations Commission on International Trade Law (UNCITRAL) for presentation at its 50th Anniversary Congress, shows why a model-law approach to sovereign debt restructuring should be realistic and effective. Nations and even subnational jurisdictions could individually enact a model law as their internal law, and contracts governed by that law would thereby become governed by the model law. Choice of law thus gives a model-law approach a powerful multiplier effect. A model-law approach could also solve the problem of pari passu clauses and address the critical need for a financially troubled nation to obtain liquidity during its restructuring process. The article proposes a form of Sovereign Debt Restructuring Model Law, which has been vetted in discussions with leading experts worldwide and also embraces the Basic Principles on Sovereign Debt Restructuring Processes adopted by the United Nations General Assembly in 2015. At the very least, pursuing the Model Law in parallel to other approaches would help to develop norms for a sovereign debt restructuring legal framework that goes beyond mere contracting.

Government agencies and prosecutors are being criticized for seeking so few indictments against individuals in the wake of the 2008-09 financial crisis and its resulting banking failures. This article analyzes why — contrary to a longstanding historical trend — personal liability may be on the decline, and whether agencies and prosecutors should be doing more. The analysis confronts fundamental policy questions concerning changing corporate and social norms. The public and the media perceive the crisis’s harm as a “wrong” caused by excessive risk-taking. But that view can be too simplistic, ignoring the reality that firms must take greater risks to try to innovate and create value in the increasingly competitive and complex global economy. This article examines how law should control that risk-taking and internalize its costs without impeding broader economic progress, focusing on two key elements of that inquiry: the extent to which corporate risk-taking should be regarded as excessive, and the extent to which personal liability should be used to control that excessive risk-taking.

This article rethinks the shareholder-primacy model of corporate governance, arguing that bondholders, who are more risk averse than shareholders, should be included in the governance of systemically important firms. The inclusion of bondholders not only could help to reduce systemic risk but also is merited by two crucial changes in the bond markets. In contrast to the past century, bond issuances have dwarfed equity issuances as the source of corporate financing for more than a decade. Bondholders therefore often have more invested in firms than shareholders. Moreover, bondholders — like shareholders — now typically trade their securities instead of holding them to maturity. That ties bond prices to the firm’s performance. Therefore bondholders, like shareholders, also have a vested interest in that performance. It therefore is logical to include bondholders in corporate governance if that could be done without impairing legitimate corporate profit-making. The article examines two ways to accomplish that: by enabling bondholders and shareholders to directly share governance, with shareholder representatives having voting control except as needed to protect bondholders from significant harm; and by requiring a firm’s managers to balance a dual duty to both bondholders and shareholders. Of these approaches, the former (sharing governance) would be simpler, involving less managerial discretion. Both of these approaches, however, should not only have lower costs but also more effectively reduce systemic risk than post-crisis regulatory experiments to try to harness bondholder risk-aversion through the forced issuance of contingent capital.

This article is an expanded version of a talk the author recently gave at a European University Institute conference on the transnationalisation of debt and solidarity in Europe. There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (also spelled securitization) transactions. The regulatory responses to securitisation in the United States and Europe are, at least in part, political reactions to the global financial crisis. As such, these responses tend to be ad hoc. To achieve a more systematic regulatory framework, this paper examines how existing regulation should be supplemented by identifying the market failures that apply distinctively to securitisation and analyzing how those market failures could be corrected. Among other things, the paper argues that Europe’s regulatory framework for simple, transparent, and standardised (“STS”) securitisations goes a long way to addressing complexity as a market failure, and that the United States should consider a similar regulatory approach.