S. International Banking and Finance: The Challenges

The year 2020 has been exceptional; whereby a recession compounded the problems of a pandemic. It provoked a massive dislocation of assets and liabilities from the private to the public sector: a rise in public debt, huge budget deficits, credit problems, the missing link between unemployment numbers the equity market. The combination of the recent evolutions threatens financial stability in both advanced and emerging economies.
Twelve years after the Global Financial Crisis, the risks taken by governments, central banks, banks, insurance companies, and capital markets have evolved. What did we learn from this evolution? How did Covid-19 affect this? These questions will be the central theme of our class, revolving around these topics:
• Banks are the subject of several regulations that aim to ensure their adequate capitalization and liquidity. Are the worldwide Basel Regulations sufficient to cope with banks’ funding risk? After the rules stemming from the Financial Crisis, looking at the current economic crisis from the pandemic, is the system strong enough to avoid a systemic bankruptcy of a large bank? What about banks’ support of the economy? How does regulation favor sovereign debt? How can banks compete with non-bank lending sources (including fintech-driven lenders)?
• The law and economics of central banks. Most of the sovereign indebtedness has found its way into the balance sheet of central banks. Central banks’ balance sheet grew, and yet, they have no exit strategy to reduce their ownership of government bonds? Did they compromise their independence by accepting to carry fiscal policy as well as monetary policy?
• Insurance companies are confronted with a changing world. They are like asset managers, particularly in the life segment – but differently regulated. How does regulation affect the insurance business?
• Enforcement of financial and securities regulation. Do the enforcement authorities have the independence and power to independently enforce rules and regulations? We will look at the treatment of short sellers by French regulators, as well as the German Wirecard fraud case in which regulators sued the Financial Times.
• Systems of payment are no longer the exclusivity of the banking sector: the development of electronic payment systems and the appearance of new types of assets such as cryptos could weaken the position of banks. Looking at Bitcoin and Facebook’s Libra, how can those “undefined assets” be regulated? Looking at the worldwide work on Central Bank Digital Currencies, and already effective in China, what are the main benefits and risks?
• Capital markets have become larger than the lending market. The current regulatory system focuses on the various types of institutions. What is the future of trading, market data, as well as exchanges – and how do regulators respond to changing capital markets? What is the ideology that underpins the capital markets and prompt the intervention of central banks?
• Investors and companies are reacting to the need to address climate change. Environmental, Social and Governance (ESG) investments are growing and challenging them. Several hurdles and recent scandals are leading to increased pressure on management and boards and their governance and transparency. Will this trend continue to grow, and is it there to stay?
• Finance has been a force in the growing inequality between people. Some mechanisms are emerging as worrying and need to be taken into consideration. What is the role of lawyers, the law and regulation in providing more equity to our societies? What are the orientations towards fairness and equity?

The purpose of this class is to improve this understanding and provide students with more background to discuss recent issues in financial regulation. Each year, we have a few guest speakers.

At the end of the semester, students write an essay on a narrow topic of their choice relevant to the course.