Kaal claims by topic: systemic-risk

379 atomic, individually citable claims from the published work of Wulf A. Kaal tagged systemic-risk.

Relative to the total number of US securities fraud and securities class action cases, foreign cubed cases are still relatively rare, although there was a substantial increase in them in 2008. 2010
German banks' exposure to CDO risk ran through credit enhancement and liquidity guarantees given to off balance sheet conduits, and because that exposure was often kept out of their accounting the inherent risk only surfaced once the CDO market collapsed. 2010
The German ABCP conduit model, which financed long term American mortgage loans with short term paper and pocketed the spread, was profitable only for as long as new buyers for the short term paper could be found, so the model collapsed the moment institutional buyers withdrew. 2010
Contesting the view that the 2008 crisis was an American problem inflicted on foreign victims, the authors argue that non U.S. institutions such as German banks were willing participants in the risk taking, even where they did not fully understand the risks they assumed. 2010
Because German banks absorbed both the 2008 credit crisis and the 2010 sovereign debt crisis while American banks faced only the first, German regulators and bankers are likely to impose stricter substantive risk management rules than countries that faced only one of those shocks. 2010
A country whose bankers do not embrace intentional risk taking is still exposed to risk, both through the collateral effects of intentional risk taking abroad and through unintentional risk taking at home, so domestic cultural restraint is not a sufficient safeguard. 2010
Under the German hazard decision doctrine, no manager acts reasonably, whether a bank officer or a board member, if the risks taken on the corporation's behalf would destroy the corporation should they be realized. 2010
The Dodd-Frank Act is notable for what it omits: it does not break up the largest banks, does little to help smaller and regional banks compete, and because compliance is burdensome and expensive may actually have raised the barrier to entry into financial services. 2010
Contingent capital is defined as the predefined conversion of a financial institution's debt securities into equity securities upon a triggering event, and this stipulated definition governs the whole analysis. 2011
Contrary to proposals that would replace Chapter 11 with contingent capital, the authors argue Chapter 11 needs no replacement; contingent capital should instead stabilize large financial firms for which Chapter 11 reorganization is not ideal or not legally available. 2011
If conversion from debt to equity is triggered too late, the institution may already be in the resolution stage, and conversion at that point may not supply enough equity to produce the intended financial improvement. 2011
The second trigger, which increases voting rights before resolution, should fire on evidence that conversion into equity was unsuccessful, that conversion came too early or too late, or that the firm's financial performance keeps trending downward. 2011
The incentive effects of corporate governance controls may not operate in systemically important financial institutions, because managers and owners who anticipate a bailout commitment adjust their risk preferences upward. 2011
By internalizing the costs of bank failure, contingent capital can reduce moral hazard, and because a contingent debt security with a conversion trigger would presumably not default, it helps avoid contagion and systemic spillovers. 2011
Contingent capital securities are likely to be more efficient than raising capital requirements, because the capital arrives only when it is needed. 2011
Although the EU debt write-down proposal gives regulators certainty and discretion, it could produce greater market uncertainty, raise costs, and have the unintended effect of increasing the size of financial institutions. 2011
Information asymmetries between market participants and a systemically important institution's management before default can be reduced if a financial weakening after conversion of contingent capital triggers a voting rights increase. 2011
Contrary to critics who blame the Basel Accords, harmonization through Basel II is not what made banks hold similar assets; banks held similar assets because those assets were profitable. 2011
Because hedge funds play a large role in the credit derivatives market and that market recently failed, an increased regulatory emphasis on banks' lending exposure to hedge funds is justified. 2011
Building on the increase in capital requirements for counterparty risk already suggested in Basel III, Basel III could add a charge on banks' assets based on their lending exposure to hedge funds. 2011
If regulators lack the resources to protect against systemic risk, hedge fund regulation could be futile. 2011
Banks' lending practices and counterparty credit risk management can curtail hedge funds' excessive risk taking because banks can use the threat of cutting off future lending to change a fund's behavior. 2011
Banks are ideally positioned to deal with asymmetric information, moral hazard, and systemic issues pertaining to hedge funds, which is why hedge fund regulation should run through bank regulation. 2011
Because banks expect to be bailed out with taxpayer funds, they may have less incentive to monitor their hedge fund lending activities, even though hedge funds are not themselves counterparties in government bailouts. 2011
Systemic risk and financial market stability are public goods, so individual banks free ride on other banks' hedge fund credit risk management and are not incentivized to adequately monitor or limit their own hedge fund risk exposure. 2011
An institution or a country creates externalities when it manages its own hedge fund generated systemic risk without considering how its actions or inactions affect risk in the system as a whole. 2011
Even if hedge fund investing does have systemic implications, systemic risk is multifaceted enough that addressing it could require more than one regulator in a single jurisdiction, so the SEC alone may be unable to accomplish the task. 2011
The SEC would be better advised to interpret the rulemaking authority it received from Congress than to increase requirements on hedge funds in order to address concerns over potential systemic risk. 2011
Basel III capital charges based on a bank's lending exposure to hedge funds could help address the threat of regulatory arbitrage. 2011
Implementing the hedge fund lending charge through Basel III would require no separate national implementation, because compliance falls on banks that have already joined the framework, so transaction costs for national regulators would be avoided. 2011
Even combining hedge fund regulation via Basel III rules with the de minimis investment rules in Dodd-Frank could leave some issues open, and calibrating such a regulatory combination requires time and experience. 2011
Contesting the exclusivity objection, exclusivity of a banking relationship is not the only effective way to exercise control and manage risk: the intensity, endurance, and quality of the relationship also influence how much control a bank can exercise over a hedge fund. 2011
Because some hedge fund trading strategies depend on the immediate availability of capital and will not work without sufficient lines of credit, banks may retain enough influence over hedge funds even where funds use multiple lenders. 2011
Banks' role in monitoring hedge funds is not easily comparable to the principal agent problem between securities buyers and credit rating agencies, because banks have more influence over hedge funds than securities buyers have over rating agencies and their ratings. 2011
Without the threat of systemic risk and without a clear delineation of the social externalities that hedge funds cause, the purpose of direct hedge fund regulation is unclear. 2011
Registering hedge funds with regulators and requiring disclosure of pertinent information could help minimize the moral hazard, social externalities, and systemic risk generated by the hedge fund industry. 2011
Where bank resolution regimes are not coordinated across jurisdictions, the same systemically important financial institution can be handled in opposite ways: it might petition for reorganization under German law and emerge leaner and more competitive, while its United States operations are liquidated under the Boxer Amendment of the Dodd-Frank Act. 2012
Contingent capital is stipulated as the predefined conversion of a financial institution's debt securities into equity securities, and on that definition it supplies an option for the efficient restructuring and resolution of failing financial institutions. 2012
Purely national crisis measures proved ineffective during the financial crisis because they could not reach cross-border banking operations or contain contagion, as the failures of Lehman Brothers, Fortis, the Icelandic banks, Northern Rock and Hypo Real Estate Holding demonstrated. 2012
Because most national crisis responses took the form of public bail-outs adopted without broad international consensus, they increased the threat of international regulatory arbitrage and damaged the global competitiveness of national financial markets. 2012
Placing bank reorganization in the hands of an administrative supervisory authority rather than a bankruptcy court, as Swiss law does, trades better sector knowledge and a faster procedure against the cost of very broad agency discretion. 2012
Reliance on public bail-outs, unaccompanied by any threat that management, shareholders and creditors would share significant losses, created an asymmetric incentive for excessive risk taking by financial institutions. 2012
Before the 2010 reform, the German regulatory intervention regime for financial institutions contained no procedure that would have reliably permitted a bank to be operated as a going concern during the financial crisis. 2012
The German provision allowing appropriate compensation of shareholders whose rights are impaired can defeat the statute's own purpose, because time is of the essence in bank reorganization and the appointment of a court-appointed expert to value shareholder claims may significantly slow the procedure. 2012
The German voluntary reorganization procedure has a structural gap: groups of financial institutions, financial holding groups and conglomerates cannot petition for protection under it, even though these are precisely the entities that qualify as systemically important and pose the highest risk to market stability on failure. 2012
Because German law fixes no threshold conditions or determining factors for market reception or market confidence, the systemic relevance and contagion determinations that turn on those factors can never be made in a reliable and objective manner. 2012
Because the amendments to the German Banking Act sharply increase the supervisor's intervention powers, the prospect that any systemically important bank would voluntarily petition under the German stabilization or reorganization procedure is remote at best. 2012
The supervisor's discretion to set a deadline for a recovery plan before issuing a transfer order is unlikely ever to be exercised in practice, because in a crisis time will be of the essence to prevent contagion. 2012
Requiring only that consideration be commensurate with the value of transferred assets invites frequent and significant disputes over valuation, a problem compounded when the consideration consists of shares in the bridge bank, whose own value must then also be assessed. 2012
The German bank levy is internally inconsistent because financial institutions without systemic relevance must contribute to the reorganization fund yet are ineligible to receive support payments from it. 2012
The German reorganization fund's maximum volume of 70 billion euros may not suffice in a financial crisis, and the availability of those funds and the time needed to raise them are an even greater concern than the ceiling itself. 2012
The German Banking Act requirement that a bridge bank have its head office inside Germany is of highly questionable compatibility with European Union law, specifically the principle of free movement of capital under Article 63 TFEU. 2012
The authors contend that the European Commission's suggested floor of 4 to 19 percent of risk-weighted assets in pre-qualified bail-inable debt under the targeted approach is unrealistically high. 2012
Implementing the European Commission's debt write-down proposal has the potential to increase funding costs for financial institutions and to make their funding more volatile. 2012
Building critical mass in the contingent capital securities market could require banks and other financial institutions to buy their competitors' contingent capital securities, which would raise ethical, antitrust and incentive concerns. 2012
A trigger that fires too late is equally useless: by then the financial institution may already be in the resolution stage, and conversion at that point will not supply enough equity to turn the company around. 2012
A second, sequential trigger placed before reorganization or resolution cushions the risk that policy makers misstructure the first trigger, absorbing the negative effects of inadequate or untimely conversion at the moment the institution needs capital. 2012
Conversion of contingent capital securities from debt to equity should be timed to occur once problems are first detected but before the early intervention powers of regulatory authorities are triggered. 2012
Using contingent capital as a preventative tool does not foreclose the statutory core power or the debt write-down tool within resolution; if early contractual write-down and conversion fail, authorities remain free to intervene and impose a haircut on shareholders, debt investors and other private parties. 2012
The Basel Committee rejected European Union Member State requests to allow contingent capital to satisfy the new capital buffer requirements under Basel III, deciding instead that systemically important institutions must meet heightened capital requirements with retained earnings and ordinary shares. 2012
Early European initiatives to put contingent convertible bonds into executive pay lack governance-improving designs; contingent convertible bonds with an early conversion trigger should be used in executive compensation instead. 2012
Market-based trigger measures are vulnerable to market manipulation and bank runs, while accounting-based measures are updated too infrequently to respond adequately in a financial crisis. 2012
To be effective, early triggers must be set well above the Basel III capital requirement threshold, and capital-ratio early triggers should be independent of regulatory demands about capitalization levels. 2012
Ordinary SIFI creditors have suboptimal incentives to monitor management because they implicitly expect that the government will provide bailout funding given the nature of the entity. 2012
Early triggers in executive compensation improve the signaling of default risk by producing the signal while default risk is present but still somewhat remote. 2012
Form PF reporting achieves broad coverage of systemic exposure with narrow coverage of firms: the SEC expects the small set of large filers to account for eighty percent of total hedge fund assets under management in the United States. 2012
Quarterly rather than annual Form PF updating for large hedge fund advisers is designed for timeliness: its purpose is to give the Financial Stability Oversight Council data current enough to identify emerging trends in systemic risk. 2012
Mandatory reporting does not guarantee informative reporting: anecdotal evidence indicates that advisers can present the information required in Forms ADV and PF in ways that in effect flatten out and sanitize the disclosures. 2012
If advisers sanitize their Form ADV and Form PF filings, the disclosures become less useful for FSOC and SEC evaluation and undermine the very determination of systemic risk posed by private funds that the reporting regime was built to enable. 2012
Government bailouts of systemically important financial institutions create strong incentives for those institutions to externalize the cost of their risk taking onto taxpayers. 2012
The implicit guarantees contained in a bailout multiply the incentives for systemically important financial institutions to increase leverage, because those guarantees make debt cheaper than equity. 2012
Because governments prioritize the rescue of systemically important financial institutions over other entities, those institutions are incentivized to adopt similar risk profiles and to correlate their risks. 2012
Combined with other corporate governance mechanisms, contingent capital securities function as an internal, institution specific mechanism that could fill the void left by regulators' apparent inability to supervise financial institutions effectively. 2012
The anecdotal record of ethically questionable conduct by leaders of systemically important financial institutions is not dispositive and does not establish an underlying trend, but it does show that some of the most pervasive cases of unethical conduct involved such institutions. 2012
Contingent capital contributes to minimizing moral hazard by internalizing bank failure costs, that is, by placing those costs on the institution's own security holders rather than on the public. 2012
Installing contingent capital can be more efficient than raising capital requirements, because the capital injection becomes available only when it is needed and only enough securities convert to recapitalize the firm. 2012
Converting contingent capital securities too late makes the capital injection superfluous, because by that stage the institution may face unresolvable difficulties that a capital injection can only marginally soften, and conversion may not suffice once the institution has entered resolution. 2012
Divergent national definitions of Tier 1 capital produce a distortion: financial institutions in countries with stricter definitions that exclude contingent capital appear to hold less capital and thinner capital cushions than institutions in countries with broader definitions, and investors may read that appearance as a negative attribute. 2012
Contingent capital rules could contribute to overriding the moral reasoning of decision makers, in which case contingent capital would actually increase, not reduce, risk incentives for institutions that are too big to fail. 2012
Regular corporate governance controls may not work in systemically important financial institutions, because those institutions are considered too big to fail and their leaders, anticipating a bailout commitment, are incentivized to shift their risk preferences upwards. 2012
Switching to contingent capital financing could reinforce rather than dampen risk incentives, and these distorted risk incentives are a drawback of contingent capital issuances. 2012
A mandatory contingent capital issuance regime induces institutions to buy their competitors' securities to satisfy regulatory obligations rather than for economic reasons, and the resulting cross holdings among systemically important institutions undermine the ability of contingent capital to limit systemic risk and contagion. 2012
Where institutions hold each other's contingent capital and share similar risk profiles, they will be hesitant after conversion to vote for necessary organizational changes at a competitor or otherwise exercise their voting rights, because they are similarly exposed and may face reciprocal voting power. 2012
Contingent capital securities approximate the characteristics of a quasi-public good: just as ships cannot readily be excluded from a lighthouse, systemically important institutions benefit from the issuance of contingent capital by other such institutions whenever the design minimizes systemic risk and contagion. 2012
Under strong institutional and cultural forces, decision makers in financial institutions tend to compartmentalize their lives and disconnect their moral reasoning from their conduct in the workplace, so that even a leader with strong personal values can engage in questionable conduct. 2012
If central banks were to purchase contingent capital securities issued by systemically important institutions in the primary or secondary market as part of monetary policy, the prospect of internalizing bank failure costs would be undermined, and primary market purchases could also undermine market participants' confidence in these instruments. 2012
Combining the existing prioritization of bailouts for systemically important institutions with central bank purchases of their contingent capital in a given jurisdiction would further incentivize those institutions to adopt similar risk profiles and correlate their risks. 2012
An outright retroactive charge for government subsidies or for actions taken by regulators could backfire, because it would legitimize the bailout and perpetuate its socially suboptimal consequences. 2012
Contingent capital can facilitate an incentive structure that lets regulators rely partially on private party contracting for the design of these securities while still accounting for systemic risk. 2012
German commentators, whose expertise German courts rely on heavily, concluded after the financial crisis that managers do not act reasonably under the German business judgment rule if the risks they take on behalf of the corporation result in the demise of the corporation. 2013
Bank crises share four core common elements: an exogenous shock, a favorable response to that shock, the dissipation of favorable conditions, and a systemic rise in bank failures. 2013
Regulatory cycles make it nearly impossible to address financial regulatory concerns adequately, and systemic risk in particular is difficult to address if rules are enacted in a cyclical and reactive format. 2013
There is a substantial overlap between the systemic risk disclosure requirements imposed on hedge fund advisers under Title IV of the Dodd-Frank Act and the disclosure requirements under the fully revised version of Bankruptcy Rule 2019. 2013
Under the regulatory framework in place at the time of writing, the threat that hedge funds' systemic risk filings could be publicly disclosed through the bankruptcy process will affect hedge funds' tactics and their role in distressed investing only marginally. 2013
Under Revised Rule 2019, parties acting in concert must disclose not only equity holdings and claims but also derivative instruments such as swaps, options, and short positions. 2013
The SEC has not standardized the disclosures required in Form PF, and there is evidence that Form PF requirements rest on an inconsistent use of industry terms, which can in turn produce inconsistent and contradictory data reporting. 2013
Creditors and shareholders in bankruptcy, unlike debtors, are typically not required to disclose their interests until they participate in the case by filing a proof of interest or claim and seeking to be heard by a judge. 2013
Because creditor disclosure obligations in bankruptcy are minimal and a general statement of the type of claim often suffices, hedge funds' penchant for secrecy carries over into the bankruptcy process even when they participate as debt holders. 2013
Old Bankruptcy Rule 2019 was applied inconsistently in practice, with courts interpreting it with a high degree of variability both across and within jurisdictions. 2013
The growing number of conflicting decisions under old Rule 2019, and the confusion and uncertainty they produced, is what precipitated the concerted effort by bankruptcy practitioners and the federal bankruptcy bench to revise the rule. 2013
Revised Rule 2019 clarifies some of the ambiguities of the old rule, but uncertainty and confusion about its application remain inevitable. 2013
The scope of Revised Rule 2019 is broader than that of the old rule because it triggers disclosure for committees, entities, and groups that are acting in concert to advance common interests and that are not composed entirely of affiliates or insiders of one another. 2013
The definition of representation in Revised Rule 2019 leaves it unclear whether attorneys who merely monitor a bankruptcy case for a client, without soliciting or advocating a position before the court, represent those clients for disclosure purposes. 2013
The central compromise in Revised Rule 2019 is that parties need not disclose the price or the date of acquisition of disclosable economic interests, which is precisely the outcome the hedge fund industry lobbied for. 2013
Systemic risk reports filed by registered investment advisers are confidential and are not publicly available, so any effect of these filings on bankruptcy practice depends on the prospect of disclosure rather than on actual public access. 2013
Mandatory quarterly Form PF reporting for large hedge fund advisers is designed to give the Financial Stability Oversight Council timely data for identifying emerging systemic risk trends and to align United States practice with international trends. 2013
Bankruptcy and systemic risk disclosure obligations for hedge funds have different origins and serve different purposes: bankruptcy disclosure is meant to level the playing field in the restructuring process, while systemic risk disclosure is meant to help regulators detect and prevent systemic consequences. 2013
Under both the bankruptcy and the systemic risk disclosure regimes, filed data carries a serious risk of being out of date and less accurate at the time it is analyzed than when it was disclosed, partly because of the lag needed to collect data before filing. 2013
Data staleness degrades systemic risk evaluation more than it degrades evaluation of bankruptcy disclosures, because many distressed investment strategies depend on the outcome of the restructuring process and creditors are therefore incentivized to hold their positions until it completes. 2013
Form PF's required disclosure of a reporting fund's strategies includes a separate subcategory for event driven, distressed and restructuring strategies, which is what makes the form potentially relevant to bankruptcy proceedings. 2013
Form PF disclosures have not been standardized, and anecdotal evidence indicates that the SEC and the FSOC may be working with contradictory, misleading, inaccurate, and incomplete systemic risk data. 2013
Form PF's systemic risk disclosure obligations were created, in a non-bankruptcy context, precisely to counteract the kind of shadow activity that is now resurfacing in bankruptcy under Revised Rule 2019. 2013
Revised Rule 2019 may in effect produce less overall disclosure of creditor activities in the bankruptcy process and push bankruptcy creditors into the shadows, the opposite of the transparency the revision sought. 2013
The overlap between hedge fund adviser disclosures under Revised Rule 2019 and systemic risk disclosures under Form PF, combined with the uncertainties Revised Rule 2019 created, points to a possible future role for systemic risk disclosures in bankruptcy. 2013
Form PF disclosures in their existing format are too generic to be appropriately applied in bankruptcy, but accumulated experience with the form and standardization of its items could yield less generic disclosures that become increasingly relevant to bankruptcy over time. 2013
Because systemic risk disclosures are far more generic and are not tailored to any specific distressed investment, importing them into bankruptcy would improve only marginally the information available about the motives of distressed securities investors. 2013
Systemic risk disclosures in the bankruptcy process would also not significantly change or limit hedge funds' influence in that process, nor would they protect against the misuse of confidential information. 2013
Bankruptcy judges and the parties to a bankruptcy case may be unable to adequately evaluate Form PF data pertaining to a creditor, which limits the usefulness of that data in bankruptcy. 2013
Using generic and possibly outdated systemic risk data in the bankruptcy process would not improve hedge funds' bankruptcy practices in the near term. 2013
Public access to hedge fund managers' systemic risk disclosures under the Dodd-Frank Act and the SEC implementation rules could improve hedge funds' distressed investments and their bankruptcy practices. 2013
Congress created distinct hedge fund adviser categories in Title IV of the Dodd-Frank Act because it recognized that not all hedge fund advisers pose the same systemic risks and therefore do not all require the same level of oversight. 2013
Title IV and the SEC forms use assets under management as a proxy for systemic threat, so that disclosure obligations scale upward with the size of the hedge fund adviser. 2013
Registering large private fund advisers works by increasing the volume of data available to regulators, which in turn may help protect against systemic risk. 2013
Registration is the gateway that makes data collection and enhanced disclosure by hedge fund managers possible, and the Dodd-Frank Act raised disclosure requirements for registered advisers specifically to address systemic risk concerns. 2013
Form PF was created to improve SEC and CFTC investigations and examinations and to enable the Financial Stability Oversight Council to monitor systemic risk in U.S. financial markets. 2013
Quarterly rather than annual reporting by large private fund advisers is intended to give the FSOC data timely enough to identify emerging systemic risk trends. 2013
Form PF requires disclosure of the reporting fund's positions and how long it would take to liquidate them, because the SEC needs a view of portfolio liquidity rather than positions alone. 2013
By prescribing the number of board meetings devoted to compliance review and requiring specific board resolutions, CIA provisions let the government contractually determine how and when a board will interact. 2013
The quarterly Form PF reporting obligation imposed on hedge fund advisers with more than $1.5 billion in regulatory assets under management is designed to give the FSOC timely data for identifying systemic risk trends. 2014
Experimentation with different rules under the current framework of stable rulemaking carries substantial costs of rule revision and enactment, and there is evidence that this framework does not protect against systemic shocks and financial crises. 2014
If advisers' allegations that Form PF disclosures cannot be answered other than by guessing are correct, then the SEC's capacity to evaluate the data is compromised, and regulation built on incomplete and misleading data will itself be questionable. 2014
Advisers themselves understand Form PF's purpose the way the statute frames it: most respondents identified assessing systemic risk and closing the historical information gap about private funds as the form's purpose. 2014
Respondents argued that the SEC's systemic risk objective would have been advanced more directly by asking a smaller set of targeted questions, emphasizing open derivatives positions, the entity's total market exposure, and its total underlying capital. 2014
A surplus of larger private fund advisers holding correspondingly larger amounts of assets under management could increase systemic risk, so a regulation that consolidates the industry may work against its own systemic risk objective. 2014
Registered investment advisers must report systemic risk relevant information to the SEC, including trading practices, trading and investment positions, the amount of assets under management, valuation policies, and side letters. 2014
Financial regulation has disparate effects on private fund advisers in comparison with other financial services providers, so evidence of scale economies in compliance drawn from banking does not transfer to private funds. 2014
The SEC data collected from private fund advisers feeds every stage of the FSOC's systemic risk assessment, and the FSOC leans most heavily on precisely those disclosure items that are the most problematic. 2014
Accuracy and consistency problems in the SEC's private fund data collection can impair the FSOC's ability to evaluate the systemic risk posed by private fund advisers. 2014
Prior studies and anecdotal evidence indicate that the data collection mandated by Form PF could itself create problems for the FSOC when it evaluates hedge fund systemic risk. 2014
The systemic risk of hedge funds arises principally from the combination of aggressive investment strategies and high leverage with adverse price movements that can dry up credit and depress the market price of collateral. 2014
Hedge funds threaten the financial system through two distinct channels: directly, by damaging systemically important financial institutions, and indirectly, by generating liquidity shocks and raising volatility in key markets. 2014
The 2008 to 2009 financial crisis altered market conditions and the factors driving private fund systemic risk, which triggered a second, distinct wave of scholarship on private funds' systemic implications. 2014
The unprecedented growth of the private fund industry combined with the low interest rate environment created by post crisis quantitative easing drove private fund managers to reach for yield. 2014
Because private fund advisers supply liquidity and perform liquidity transformation in the manner of banks, the vulnerabilities their bank like activities create can carry large consequences for financial stability. 2014
International regulators agree on designation criteria but not on the unit of assessment: the FSB and IOSCO assess systemic importance at the fund level while the OFR would assess it at the asset manager level with all funds combined. 2014
National regulators reached opposite conclusions on the same question: unlike the OFR, FSB and IOSCO, the United Kingdom's Financial Services Authority concluded from its first comprehensive survey of London's hedge fund industry that the industry poses no systemic risk. 2014
Form PF data was tailored primarily for the FSOC rather than for the SEC's own purposes, a design choice that shaped the level of reporting required. 2014
The FSOC's powers over nonbank financial institutions are broad and without precedent in United States financial regulation. 2014
The quantitative measures used in systemic risk assessment are not codified in statute, so the FSOC can alter its thresholds and its analysis through rulemaking. 2014
Commonly managed investment funds holding $50 billion or more in aggregate total consolidated assets can be designated systemically important, and following a similar investment strategy across those funds makes designation more likely. 2014
Stage one of the FSOC's designation process is a mechanical screen: six quantitative thresholds filter out nonbank financial institutions unlikely to pose significant systemic risk before any institution specific or qualitative analysis begins. 2014
SIFI designation changes the nature of regulation for a nonbank financial institution, subjecting it to substantial additional regulation and forcing it to change how it does business, which can in turn constrain its growth. 2014
The FSOC's three stage SIFI review process depends heavily on information that private fund investment advisers supply through Form PF. 2014
Form PF information addresses most of the FSOC's stage one thresholds either directly or indirectly, so the mechanical screen runs largely on adviser reported data. 2014
The FSOC itself conceded that available data was insufficient when it tried to identify the activities of the twenty largest United States fund managers as possible sources of systemic risk. 2014
Because several core Form PF questions feeding the FSOC's stage one threshold screen are themselves defective, the FSOC's systemic risk assessment process could be compromised. 2014
Because the FSOC uses RAUM related valuations directly and indirectly to set stage one thresholds, and because RAUM requires substantial filer interpretation, it is questionable whether the FSOC can use that Form PF data effectively and sustainably for systemic risk evaluations and SIFI designations. 2014
The Form PF counterparty questions most affected by filer interpretation, Questions 22 and 23, are the very ones the FSOC uses in stage two to determine the interconnectedness of private funds. 2014
If the FSOC relies on inaccurate Form PF data in its systemic risk assessment, its work on private funds may itself be erroneous. 2014
Private fund advisers reporting under Form PF encountered issues that could affect the FSOC's systemic risk assessment, but the author does not claim that the FSOC is unable to fulfill its congressional mandate. 2014
Matching the identified Form PF defects against the FSOC's specific uses of that data suggests possible inaccuracies in the FSOC's systemic risk assessment process, although the author disclaims scientific or empirical precision for the analysis. 2014
Fixing the identified problems with Form PF data would help optimize the FSOC's systemic risk assessment of private funds. 2014
The positive post-announcement reaction is best read as the market rewarding both the end of a costly DOJ investigation and the governance terms the N/DPA is expected to impose. 2015
Lifting the advertising ban for hedge fund advisers under the JOBS Act, combined with FSOC treating mutual and hedge funds alike for SIFI designation, effectively assimilated the advertising requirements applicable to the two asset classes. 2016
FSOC's SIFI designation framework does not distinguish between mutual and hedge funds, even though evidence indicates designation would have disparate effects on the two asset classes. 2016
The Volcker Rule cuts banks off from direct hedge fund investment and thereby pushes them toward accessing hedge fund strategies through retail alternative funds, a shift that could be substantial given banks' prior role as major hedge fund investors. 2016
The mutual fund industry of the future could carry more risk than its historical averages suggest, a possibility with systemic implications given the comparative size of the mutual fund market. 2016
The quarterly Form PF reporting obligation imposed on advisers with more than $1.5 billion in regulatory assets under management attributable to private funds exists to give the FSOC timely data for identifying trends in systemic risk. 2016
Although the extent and causes of rulemaking ossification remain empirically uncertain, increased legal and evidentiary burdens on regulatory authorities are the consensus explanation for the slowdown in agency rulemaking. 2016
Government assessments of hedge fund systemic risk conflict directly: the OFR, FSB, and IOSCO treat private fund activities as important threats to the financial system, while the UK Financial Services Authority concluded from its first comprehensive survey of London's private fund industry that hedge funds pose no systemic risk. 2016
Despite conflicting government reports, the weight of post-crisis evidence from leading financial economists supports the conclusion that hedge funds introduce at least some systemic risk into the financial system. 2016
Public perception, rather than measured risk, is the principal driver of the hedge fund systemic risk debate and of the policy responses to it, and that perception is shaped chiefly by industry growth and by the collapse of prominent funds. 2016
The combination of unprecedented private fund industry growth and the low interest rate environment produced by post-crisis quantitative easing pushed private fund managers into reaching for yield, and the leverage and complex derivative transactions used to boost that yield further increased private funds' systemic risk. 2016
Because hedge fund losses are absorbed directly by a large and dispersed body of investors and their equity capital, private fund advisers are unlikely to trigger a systemic event, and their activity may even reduce market volatility. 2016
Post-LTCM counterparty credit risk management, in which regulators pressed banks to monitor and limit the leverage of their hedge fund clients, appears to have worked: the Amaranth failure produced no financial market repercussions. 2016
Market events like the LTCM failure can escalate into global financial crises when many highly leveraged hedge funds holding illiquid portfolios are obligors of a small number of major financial institutions, because adverse price movements dry up credit and depress collateral values. 2016
Private fund advisers in the shadow banking system perform bank-like functions, providing liquidity to clients and to financial markets and engaging in various forms of liquidity transformation, and the vulnerabilities this creates may have large implications for financial stability. 2016
Any conclusion that hedge funds contributed to the financial crisis of 2007-2008 is circumstantial or anecdotal, because the data needed to test it, on leverage, counterparty relations, AUM, and portfolio holdings, were not collected for any substantial period before the crisis. 2016
The opacity of the hedge fund shadow banking system blocks direct measurement of hedge funds' role in the crisis, leaving researchers with indirect measures extracted from existing data rather than primary pre-crisis sources. 2016
The contagion story, in which hedge fund losses spread to other financial institutions and undermine systemic stability, is counterbalanced in practice because hedge fund collapses are rarely sudden and almost always unfold in incremental steps over a long period. 2016
Hedge funds' risk management practices are typically evolved enough to constitute a major barrier to systemic shocks, and their trading counterparties and lenders further help prevent losses large enough to disrupt the financial system. 2016
The performance pressure on hedge fund managers incentivizes them to take disproportionately high risks in order to deliver sufficient client returns, and those disproportionate risks translate into proportional systemic risks. 2016
Market-neutral arbitrage strategies implicitly minimize systemic risk, because funds using them construct returns that do not depend on the direction of the market. 2016
The systemic risk of hedge fund leverage comes from its capacity to amplify liquidity losses and to contribute to asset overvaluation during bull markets, not from leverage as such. 2016
When hedge funds simultaneously liquidate positions and reduce leverage, leverage generates a fire-sale externality that raises systemic risk, arising when a fund must sell assets it regards as drastically undervalued in order to meet margin calls or redemption requests. 2016
Concern about hedge fund leverage is empirically overstated: since the collapse of LTCM in 1998 the industry's exposure to leverage has been relatively modest, especially compared with the mean leverage of investment banks and broker/dealers. 2016
Strategy diversification does not insulate the hedge fund industry from systemic risk: returns across different hedge fund strategies were more correlated during the financial crisis of 2007-2008 than before it, so the industry can pose systemic risk despite investing across a broad spectrum of assets and strategies. 2016
Hedge fund contagion is defined as correlation over and above what one would expect from economic fundamentals, and clusters of suboptimal returns across investment styles count as contagion precisely because known risk factors for hedge fund performance cannot explain them. 2016
The growth of hedge fund replication strategies packaged in exchange traded funds may further increase the systemic risks associated with certain hedge fund strategies. 2016
Title IV of the Dodd-Frank Act addresses alleged hedge fund systemic risk through an information strategy rather than a substantive one: it authorized the SEC to require registration and enhanced disclosure from private fund advisers and to facilitate data collection for assessing systemic risk. 2016
The FSOC's powers over hedge funds and other nonbank financial institutions are broad and unprecedented in U.S. financial regulation, including the power to subject hedge funds to extensive Federal Reserve supervision and to designate a fund systemically important on its own initiative by a two-thirds vote. 2016
The SIFI designation regime does not reach hedge funds in practice: because the asset threshold is set high, at $50 billion or more in aggregate total consolidated assets, hedge funds are unlikely to be designated as systemically important financial institutions. 2016
Systemic risk rankings that place a loosely defined other financial services sector above banking and insurance are of limited use, because the analysis does not clearly identify the firms included in that category even though a substantial portion of them may be hedge funds. 2016
Hedge funds now supply funding to the banking system that may be rapidly withdrawn during a liquidity crisis and supply a substantial share of the sellers' side of the credit default swap market, thereby assuming risks traditionally held by investment banks and insurance companies. 2016
Hedge funds have the potential both to amplify and to mitigate systemic risk, and which effect dominates turns on their particular risk management incentives, leverage, and investment strategies, which is why the academic evidence remains mixed. 2016
The most useful product of the post-crisis empirical literature for regulators is a set of methodologies for evaluating hedge fund systemic risk and prescribing remedies, especially methodologies addressing the counterparty credit measures of hedge funds and their prime brokers. 2016
Formal rulemaking is simply too time-consuming for an environment of disruptive innovation; the speed of product innovation alone makes formal rulemaking in the existing infrastructure unworkable. 2016
Private fund investor due diligence may follow the evolutionary path of bank risk evaluation, which fifteen years ago operated without uniformity or applicable standards and is today heavily regulated and has evolved into a science. 2016
The collapse of Long Term Capital Management in 1998 and its Federal Reserve orchestrated bailout made hedge fund risk to international markets apparent, and concerns over excessive leverage combined with a lack of transparency drove the demand for new regulation. 2016
Proposals for indirect regulation of hedge funds through the regulation of the financial institutions that interact with them are unlikely to become legally binding. 2016