tag:theconversation.com,2011:/us/topics/financial-regulations-67217/articlesFinancial regulations – The Conversation2023-12-01T12:14:48Ztag:theconversation.com,2011:article/2189392023-12-01T12:14:48Z2023-12-01T12:14:48ZFTX and Binance: how latest crypto scandals could influence public opinion on digital currency regulation<p>True believers in cryptocurrency have had a rough few weeks. The US government just <a href="https://www.nytimes.com/2023/11/21/technology/binance-changpeng-zhao-pleads-guilty.html">fined Binance</a> – the world’s largest crypto exchange – US$4.3 billion (£3.4 billion) for its involvement in money laundering. </p>
<p>It forced the firm to accept <a href="https://www.programmablemutter.com/p/how-the-feds-bounced-binance?utm_source=profile&utm_medium=reader2">intrusive monitoring</a> and demanded that its secretive boss, Changpeng Zhao, step down and pay a personal fine of $50 million. Zhao, known as CZ, has been called the <a href="https://www.reuters.com/technology/changpeng-zhao-crypto-king-binance-chief-ousted-us-crimes-2023-11-21/">most powerful man in crypto</a>.</p>
<p>The industry is still reeling from the conviction of Zhao’s bitter rival, Sam Bankman-Fried, earlier in November on seven counts of fraud and conspiracy. His company FTX – previously the second-largest crypto exchange in the world – collapsed in November 2022. SBF, as he is commonly known, could theoretically face more than 100 years in jail when he is sentenced <a href="https://www.nytimes.com/2023/11/11/business/dealbook/sam-bankman-fried-sentencing.html#:%7E:text=The%20maximum%20term%20is%20more,country%2C%20also%20allow%20for%20flexibility.">in March 2024</a>. Several other <a href="https://www.ft.com/content/b95708cd-d4ce-41ce-886a-3c119a7df9a3">former leading crypto executives</a> are also under investigation or being prosecuted. </p>
<p>Crypto has just squared off against the US state, and at halftime the result is state power 2 – crypto 0. After this display of muscular regulation on one side of the Atlantic, what is the future of crypto regulation in the UK? </p>
<p>The UK government has repeatedly <a href="https://www.gov.uk/government/news/government-sets-out-plan-to-make-uk-a-global-cryptoasset-technology-hub">vaunted its ambition</a> to make the UK a global crypto hub. The new minister for the City of London, Bim Afolami, <a href="https://www.ft.com/content/3c833ac4-f74d-4663-b144-e1ea6996cadb">doubled down</a> on this message shortly after taking up his post, warning regulators against going overboard. Speaking at a Financial Times event on global banking, he said: “If you’re regulating a market, in any area, there’s no point in having the safest graveyard”. And then added: “It’s really important that we don’t tar every crypto business as being like FTX or Binance.”</p>
<p>This attitude could put Afolami and the government on a collision course with UK regulator the Financial Conduct Authority (FCA). Former FCA chair Charles Randell <a href="https://www.ft.com/content/723b5753-06e1-4cd8-a629-dd795f9068f2">recently criticised</a> the government’s plans for treating crypto like any other financial investment, saying they risked normalising crypto even though fraud “is a feature, not a bug” of much of the sector.</p>
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<a href="https://theconversation.com/what-binances-us-lawsuit-says-about-the-future-for-cryptocurrency-regulation-202930">What Binance's US lawsuit says about the future for cryptocurrency regulation</a>
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<h2>Changing opinions about financial regulation</h2>
<p>The government would say that its view is the democratically legitimate one – no one has elected the FCA. But research shows British people may respond to revelations of wrongdoing in the sector by wanting to regulate crypto more severely.</p>
<p>Through the <a href="https://banklash.bsg.ox.ac.uk/">Banklash</a> research project, my colleagues and I have studied what happens to public opinion about financial regulation when people are exposed to news about financial scandals, such as the <a href="https://www.bournemouth.ac.uk/news/2020-08-24/opinion-ppi-scandal-far-over-heres-why">payment protection insurance scandal</a> in the UK. We found that in multiple countries, the public has clear views about financial regulation, and that when they read about scandals, their <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/ajps.12752">demand for regulatory stringency increases</a>.</p>
<p>Such changes in public opinion are not simply abstract experimental effects. In a separate article, Harvard professor Taeku Lee and I <a href="https://academic.oup.com/ser/article/20/2/635/5933801">have shown</a> how a US Congress <a href="https://www.theguardian.com/business/2010/apr/27/goldman-sachs-senate-committee-hearing">investigation of Goldman Sachs’</a> role in the global financial crisis drew public attention to malfeasance by big banks and the position of political parties on it. In the wake of this explosion of publicity, Republicans dropped their filibuster of <a href="https://www.nytimes.com/2010/07/16/business/16regulate.html">the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act</a>, which was the biggest reform of US financial regulation since the 1930s. Two years after the financial crisis, defending the unpopular big banks was not a hill the Republicans wanted to die on.</p>
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<a href="https://theconversation.com/crypto-what-could-more-regulation-mean-for-the-future-of-digital-currencies-194322">Crypto: what could more regulation mean for the future of digital currencies?</a>
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<p>We have followed up this research with a study this year of British attitudes towards cryptocurrency. Our new work, which has not yet been published in an academic journal, suggests that the FCA is more in tune with British public opinion than the government. Among the four countries we surveyed in March 2023 – with responses from more than 36,000 people – British respondents expressed the highest level of support for crypto regulation. Americans want the least, while France and Germany fall in the middle.</p>
<p>As part of the same study, we also investigated how consuming media coverage of the FTX scandal affected those attitudes. Reading about the scandal caused a significant increase in the appetite to regulate crypto among Brits, starting from an already high base. This is the same effect we found in other areas of financial regulation in our earlier research.</p>
<h2>Understanding opinions about crypto</h2>
<p>It seems reasonable to expect that the recent demonstrations of malfeasance by CZ and SBF will lead to a toughening of public attitudes about the regulation of crypto. Despite the fact that cryptocurrency is perceived as an esoteric topic, people have views about it.</p>
<p>UK politicians would be well-advised to take these views into account when trying to balance demands for regulatory stringency and the economic defence of London’s status as an international financial hub. The US government has flexed its regulatory muscles without concern for damaging the appeal of its crypto market, although of course that market is much larger.</p>
<p>Political leaders in the UK should not deceive themselves that the general public doesn’t understand these issues. There will be an election next year. And as Bankman-Fried and Zhao have discovered, you can fool some of the people some of the time, but you can’t fool all the people all the time. Even on a subject as apparently baffling as crypto.</p><img src="https://counter.theconversation.com/content/218939/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pepper Culpepper's research was supported financially by an Advanced Grant from the European Research Council under the European Union's Horizon 2020 research and innovation program (grant agreement no. 787887).</span></em></p>The general public may want tighter crypto regulations but is the UK government listening?Pepper Culpepper, Blavatnik Professor of Government and Public Policy, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2169912023-11-03T04:18:06Z2023-11-03T04:18:06ZSam Bankman-Fried convicted for massive FTX fraud, in stark reminder of risks of crypto trading<p>It is not just crypto tokens that have spectacular downfalls. So can crypto personalities. </p>
<p>Sam Bankman-Fried founded FTX, one of the world’s largest exchanges for so-called cryptocurrencies, which collapsed last year owing billions of dollars. Now he has gone from being hailed as potentially the <a href="https://www.newyorker.com/magazine/2023/10/02/inside-sam-bankman-frieds-family-bubble">world’s first trillionaire</a> to a lengthy term in prison.</p>
<p>After a month-long trial, a New York jury took less than five hours to <a href="https://www.theverge.com/policy/2023/11/2/23943236/sam-bankman-fried-trial-sbf-fraud-guilty">find him guilty</a> on seven counts of fraud and money laundering. </p>
<p>Bankman-Fried’s conviction highlights the risks of crypto markets, where people trade tokens with no fundamental value via hugely complex and poorly regulated financial machinery.</p>
<p>The Australian government is currently considering how to protect consumers in such markets. Treasury has commenced a <a href="https://treasury.gov.au/consultation/c2023-427004">consultation process</a>. But it will not be an easy task when so much of the activity occurs overseas or in cyberspace.</p>
<h2>FTX was not fine</h2>
<p>Bankman-Fried chose to testify in his own defence. But he failed to convince the jury he was merely a <a href="https://www.reuters.com/legal/sam-bankman-frieds-trial-ftx-fraud-charges-heads-closing-arguments-2023-11-01/">maths nerd</a> with a poor memory who was unaware of what his friends and colleagues were doing with the companies in which he was the largest stakeholder.</p>
<p>In FTX’s final days, as concerned customers started withdrawing their deposits, Bankman-Fried tweeted “<a href="https://www.ft.com/content/eef6d795-3442-44e1-bab4-05863094d9b9">FTX is fine. Assets are fine</a>”. It appears the jury did not accept he truly believed this at the time.</p>
<p>The verdict is a salutary warning about the dangers of unregulated financial markets such as crypto. As the former chair of the United Kingdom’s Financial Conduct Authority put it, fraud is “<a href="https://www.ft.com/content/723b5753-06e1-4cd8-a629-dd795f9068f2">a feature, not a bug</a>” for much of the industry.</p>
<p>Crypto tokens such as Bitcoin have no underlying assets to give them some fundamental value. They only generate a return if the owner can sell at a higher price, to someone who expects the price to go even higher. This makes them one of the purest examples of a speculative bubble.</p>
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Read more:
<a href="https://theconversation.com/almost-no-one-uses-bitcoin-as-currency-new-data-proves-its-actually-more-like-gambling-207909">Almost no one uses Bitcoin as currency, new data proves. It's actually more like gambling</a>
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<h2>No government</h2>
<p>One of the ironies of the crypto market is that cryptocurrency is sold as a way to avoid having to trust governments or banks, as one does with traditional currency. But in practice, crypto trading often relies on trusting individuals – some of them charlatans such as Bankman-Fried.</p>
<p>Punters thought they could trust FTX to mind their funds for them while they switched between speculative crypto tokens such as Bitcoin and Dogecoin. They were not investing in FTX, or even lending their money to it. </p>
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Read more:
<a href="https://theconversation.com/the-spectacular-collapse-of-a-30-billion-crypto-exchange-should-come-as-no-surprise-194442">The spectacular collapse of a $30 billion crypto exchange should come as no surprise</a>
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<p>But instead of letting customers’ funds sit around waiting to be withdrawn, FTX transferred a lot of them to another company, Alameda Research. This was an investment fund, poorly run by Bankman-Fried and his cronies. </p>
<p>It is still not clear what happened to all the missing billions. Some of the money was frittered away on extravagant living. Some went to pay celebrities for advertisements and endorsements, such as the famous Super Bowl clip starring comedian Larry David. At least David can say he was warning people against “getting into crypto”.</p>
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<p>Some of the missing cash went on large political donations. Much was lost on poor bets by Alameda which failed to hedge against the risk that the price of crypto tokens could quickly plummet.</p>
<p>FTX was essentially a casino. But Bankman-Fried both owned the casino and was gambling in it – and gambling with other people’s chips. </p>
<h2>Prison looms</h2>
<p>Bankman-Fried is still <a href="https://www.reuters.com/legal/ftx-founder-sam-bankman-fried-thought-rules-did-not-apply-him-prosecutor-says-2023-11-02">proclaiming his innocence</a>. But he looks likely to be in prison for decades. </p>
<p>He will find out how long on March 28 2024. It <a href="https://www.ft.com/content/24d153b0-0c28-4946-acbe-2e93329bca52">could be more than a century</a> if he receives the maximum penalty on all the counts on which he has been convicted. And he may yet face further charges. </p>
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Read more:
<a href="https://theconversation.com/fallen-crypto-king-sam-bankman-fried-was-perfectly-positioned-to-make-a-religion-of-himself-213893">Fallen crypto king Sam Bankman-Fried was 'perfectly positioned to make a religion of himself'</a>
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<p class="fine-print"><em><span>John Hawkins does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cryptocurrency tycoon Sam Bankman-Fried may face a jail term of more than a century after conviction on seven counts of fraud and money laundering.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2151962023-10-30T13:33:05Z2023-10-30T13:33:05ZWhat Revolut’s attempt to secure a UK banking licence could mean for its current customers and for the ‘unbanked’<figure><img src="https://images.theconversation.com/files/556090/original/file-20231026-15-8jym8f.jpeg?ixlib=rb-1.1.0&rect=10%2C3%2C1200%2C792&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Revolut CEO Nik Storonsky: all he wanted for Christmas (2022) was a UK banking licence.</span> <span class="attribution"><a class="source" href="https://www.revolut.com/news/">Revolut</a></span></figcaption></figure><p>Last year, the CEO of financial technology (fintech) company Revolut added a UK banking license to his 2022 Christmas wish list, <a href="https://sifted.eu/articles/revolut-storonsky-fundraise-interview">telling startup news outlet Sifted</a>: “I would love to have it as a Christmas present. A present for me personally and for the business.” </p>
<p>But it’s nearly Christmas 2023 and Revolut still hasn’t secured the right to take deposits from the UK customers – the main benefit to the company of getting a UK license. </p>
<p>Revolut has been offering e-money services such as currency exchange and transfers (which do not require a UK banking licence) in the UK since 2015. It generated £196 million in revenue from this <a href="https://www.revolut.com/financial-statements/">in 2021</a>, or nearly one-third of its business – the rest mostly comes from banking activities in 18 EU countries.</p>
<p>Revolut, which says it has <a href="https://www.revolut.com/en-IE/news/revolut_surpasses_30_million_retail_customers_worldwide/">more than 30 million retail customers worldwide</a>, now wants to join other “<a href="https://www.which.co.uk/money/banking/bank-accounts/challenger-and-mobile-banks-aiYuO7u4JjWJ">challenger banks</a>” (those attempting to break the historical dominance of the “big four” UK banks: Barclays, Lloyds, HSBC, NatWest) in becoming a fully licensed bank in the UK. </p>
<p>The main benefit of this would be that it could take deposits <a href="https://www.altfi.com/article/6274_revolut-reportedly-preparing-uk-banking-licence-application">and handle more loan business</a> instead of “outsourcing” these activities to a number of UK-licensed banks. It could also boost financial inclusion by providing people in the UK with more choice and access to products that help manage money – a key concern amid the current cost of living crisis.</p>
<p>Whether deposits are handled directly by Revolut or through a third-party provider is unlikely to make much difference to customers. But for Revolut, outsourcing means additional costs so this could provide the company with cheaper access to finance. So, in theory, Revolut could pass any savings on to its customers.</p>
<p>Getting a UK banking license involves an extensive application process but <a href="https://www.ft.com/content/6d2eef34-d414-49c7-8557-c43a3d9ab803">typically takes about a year</a>. Once a bank gets one, it has to adhere to more stringent reporting and monitoring requirements. </p>
<p>During the nearly two years since Revolut first applied in January 2021, it has experienced IT system issues that have delayed its reporting of annual accounts. Requesting an extension is not an unusual process, but <a href="https://www.uktech.news/fintech/revolut-auditor-revenue-bdo-20230302#:%7E:text=The%20report%20stated%20the%20company,of%20the%20company's%20reported%20revenue.">concerns were also raised by Revolut’s auditor BDO</a> about its 2021 revenue reporting. </p>
<p>In March 2023, a Revolut spokesperson <a href="https://www.reuters.com/business/finance/revoluts-2022-revenues-grew-by-33-despite-crypto-winter-2023-03-01/#:%7E:text=Finance-,Revolut%20auditor%20flags%20concern%20about%20%24576%20mln,in%20long%2Ddelayed%202021%20accounts&text=LONDON%2C%20March%201%20(Reuters),its%20long%2Ddelayed%202021%20accounts.">told Reuters</a> the concerns were “remedied” in 2021. The company’s chief financial officer Mikko Salovaara said: “There is not any doubt over the completeness of the balance sheet, which, in turn, logically means that total revenue is also correct.”</p>
<p>More recently, Revolut has <a href="https://www.reuters.com/business/finance/revolut-strikes-share-deal-with-softbank-remove-barrier-uk-licence-ft-2023-10-03/">simplified its ownership structure</a> – its use of different classes of shares was more common in EU countries – which could help unblock the UK banking license application process for the company.</p>
<p>Whether, after all of this, customers would actually benefit from lower operating costs will depend on various factors, including what the competition is charging and the need for Revolut to maintain its profitability. </p>
<p>Another possible (perceived) benefit for customers could be greater financial security. Deposits of up to £85,000 held with licensed banks are secured through the Financial Services Compensation Scheme (<a href="https://www.fscs.org.uk/">FSCS</a>). However, the outsourcing model already offers the same protection to Revolut users if its third-party provider operates with its own UK banking license anyway.</p>
<h2>Enhancing UK financial inclusion</h2>
<p>More generally, fintech companies offer easier and often cheaper <a href="https://www.bis.org/cpmi/publ/d191.htm">access to financial products</a> than traditional banks, which means they boost financial inclusion according to <a href="https://onlinelibrary.wiley.com/doi/full/10.1002/jid.3524">research-based definitions</a>.</p>
<p>World Bank <a href="https://www.worldbank.org/en/publication/globalfindex">research on financial inclusion</a> suggests the UK scores almost perfectly in this area: 99.76% of respondents to World Bank surveys have personal current accounts and 95.46% with a debit card (although only 88.91% say they use their card). </p>
<p><strong>How people bank in the UK:</strong></p>
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<a href="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bar chart showing results of World Bank survey of UK banking customers." src="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.worldbank.org/en/publication/globalfindex">Author provided using data from the World Bank Findex Database, 2021</a></span>
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<p>But the limited sample size for the UK (the World Bank’s survey relies on 128,000 adults in 123 countries) makes it difficult to truly identify the small number of “unbanked” people in the UK and their struggles. The Financial Conduct Authority’s (FCA) more comprehensive <a href="https://www.fca.org.uk/publication/financial-lives/financial-lives-survey-2022-key-findings.pdf">Financial Lives Survey</a> puts the number of unbanked people in the UK at 1.1 million in 2022, down from 1.7 million in 2014 but largely unchanged since 2017. </p>
<p>The UK Treasury’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1125329/Financial_Inclusion_Report__002_.pdf">Financial Inclusion Report 2021-22</a> argues that the more basic bank accounts now offered by all banks have improved financial inclusion, but it also stresses the importance of fintechs in increasing choice and launching innovative products like mobile budgeting tools. </p>
<p>On the other hand, fintech’s reliance on mobile and internet banking arguably widens an existing digital divide. According to the World Bank, <a href="https://www.worldbank.org/en/publication/globalfindex">92% of UK respondents</a> had access to the internet and used mobile phones in 2021, leaving some without access to fintech products. </p>
<p>For those that can access them, fintech solutions could help reduce costs and provide tools to manage people’s stretched budgets. This could help mitigate the current <a href="https://theconversation.com/uk/topics/cost-of-living-crisis-115238">cost of living crisis</a> while also enhancing financial inclusion. Studies show better financial inclusion can <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2020.1792960">reduce income inequality</a> under certain conditions. </p>
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<img alt="Woman sitting in a window using a laptop." src="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Tech companies can provide easier access to financial products.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-pondering-female-person-beautiful-curly-747373468">GaudiLab/Shutterstock</a></span>
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<h2>Becoming a challenger bank</h2>
<p>Revolut has a convincing track record of obtaining banking licences in its short history. After its 2015 UK launch, Revolut obtained its first banking licence in Lithuania in 2018. It has operated as a bank in 18 EU countries since 2021. That same year, Revolut applied to become a deposit-taking institution in Australia. This is a good sign that its UK banking licence should be achievable. </p>
<p>However, the benefits for customers are less clear. Most customers already use e-money accounts together with traditional bank accounts. Looking at <a href="https://www.thebanker.com/What-does-Metro-Bank-s-troubles-mean-for-UK-challenger-banks-1698136247">Metro Bank’s recent problems</a> – investors were <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">concerned</a> that it could not meet regulatory requirements on its capital levels, although it has since <a href="https://news.sky.com/story/metro-bank-seeks-bids-within-weeks-for-3bn-mortgage-book-12984988">secured additional financing</a> and continues to serve customers as normal – it is not evident that one more challenger bank will benefit UK customers. </p>
<p>On the other hand, a more comprehensive range of different types of financial service providers <a href="https://www.tandfonline.com/doi/full/10.1080/02692171.2022.2090522">tends to stabilise the financial system</a>. In this sense, diversity could enhance financial stability.</p><img src="https://counter.theconversation.com/content/215196/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span><a href="mailto:gerhard.kling@abdn.ac.uk">gerhard.kling@abdn.ac.uk</a> receives funding from the ESRC-NSFC (Newton Fund), FP7, FP6, and the Maava Foundation.</span></em></p><p class="fine-print"><em><span>Aravinda Meera Guntupalli receives funding from ESRC, GCRF, World Cancer Research Fund, Canadian government and World Bank. </span></em></p>More diversity in the banking sector can help with stability, but Revolut’s two-year wait for a UK banking licence indicates regulatory caution.Gerhard Kling, Chair in Finance, University of AberdeenAravinda Meera Guntupalli, Senior Lecturer in Global Health, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2154212023-10-15T12:27:45Z2023-10-15T12:27:45ZThe hidden risks of buy now, pay later: What shoppers need to know<figure><img src="https://images.theconversation.com/files/553377/original/file-20231011-25-bvjczk.jpg?ixlib=rb-1.1.0&rect=50%2C70%2C6659%2C4396&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Buy now, pay later loans target low-income, tech-savvy Gen Z and millennial consumers under the guise of improving financial inclusion for these groups.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/the-hidden-risks-of-buy-now-pay-later-what-shoppers-need-to-know" width="100%" height="400"></iframe>
<p><a href="https://www.canada.ca/en/financial-consumer-agency/services/loans/buy-now-pay-later.html">Buy now, pay later</a> is a relatively new form of financial technology that allows consumers to purchase an item immediately and repay the balance at a later time in instalments.</p>
<p>Unlike applying for a credit card, buy now, pay later <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4591446">doesn’t require a credit check</a>. Instead, <a href="https://doi.org/10.1108/EJM-11-2021-0923">these programs use algorithms</a> to perform <a href="https://www.investopedia.com/terms/s/soft-inquiry.asp">“soft” credit checks</a> to determine <a href="https://theconversation.com/if-it-looks-like-debt-lets-treat-it-like-debt-buy-now-pay-later-schemes-need-firmer-regulation-in-nz-211820">a shopper’s eligibility</a>. </p>
<p>This means buy now, pay later loans target <a href="https://www.theguardian.com/money/2022/jan/27/buy-now-pay-later-schemes-entice-consumers-spend-more">low-income, tech-savvy</a> <a href="https://www.cnbc.com/2022/10/27/gen-z-and-millennials-prefer-buy-now-pay-later-services.html">millennials and Gen Z shoppers</a> in an effort to <a href="https://libertystreeteconomics.newyorkfed.org/2023/09/who-uses-buy-now-pay-later/">supposedly improve financial inclusion</a> for these groups.</p>
<p>However, the newness of buy now, pay later programs means existing <a href="https://doi.org/10.1111/acfi.13100">consumer credit laws don’t cover it</a>. This lack of regulation puts shoppers at financial risk of accumulating higher levels of debt.</p>
<h2>Credit cards versus buy now, pay later</h2>
<p>There are three key differences between credit cards and buy now, pay later loans. First, while buy now, pay later loans are a line of credit like credit cards are, <a href="https://www.cnbc.com/2022/05/04/klarna-to-report-buy-now-pay-later-data-to-uk-credit-bureaus.html">they don’t impact credit reports</a>. Because of this, shoppers might be less cautious when using buy now, pay later services. </p>
<p>Credit cards typically have annual interest rates ranging from <a href="https://www.bankrate.com/finance/credit-cards/what-is-credit-card-apr/#credit-card-apr-vs-credit-card-interest">15 to 26 per cent</a>. While most buy now, pay later loans have no interest, longer term loans have <a href="https://www.cbsnews.com/news/buy-now-pay-later-loans-interest-rate-fees-tips-what-to-know/">annual interest rates of about 37 per cent</a>. </p>
<p>Shoppers are <a href="https://hbswk.hbs.edu/item/buy-now-pay-later-how-retails-hot-feature-hurts-lower-income-shoppers">at risk of overusing buy now, pay later programs</a> and accumulating more debt than they can manage. In addition, formal lenders, such as banks, currently have no way of knowing what buy now, pay later debt a person is carrying. The lender, therefore, likely incurs more risk than they are aware of.</p>
<figure class="align-center ">
<img alt="A close-up of a pair of hands using a credit card reader in a store" src="https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553391/original/file-20231011-17-d7tii0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Unlike applying for a credit card, buy now, pay later services don’t require consumers to get a credit check.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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</figure>
<p>Second, credit cards typically provide <a href="https://doi.org/10.1080/1369118X.2022.2161830">an interest-free period</a>, after which <a href="https://doi.org/10.1177/03128962211032448">borrowers must pay interest</a>. In contrast, buy now, pay later users typically don’t have interest fees, but can incur <a href="https://doi.org/10.1108/IJBM-07-2022-0324">late fees for missed or late payments</a>. </p>
<p>Falling behind on payment terms <a href="https://www.forbes.com/sites/andriacheng/2020/12/16/why-retailers-are-embracing-buy-now-pay-later-service-this-holiday-season/">can result in charges</a> that exceed <a href="https://stateline.org/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans/">typical credit card interest rates</a>, causing more harm than interest payments. Low-income buy now, pay later users are <a href="https://hbswk.hbs.edu/item/buy-now-pay-later-how-retails-hot-feature-hurts-lower-income-shoppers">particularly vulnerable</a> to <a href="https://www.consumerfinance.gov/data-research/research-reports/consumer-use-of-buy-now-pay-later-insights-from-the-cfpb-making-ends-meet-survey/">using overdrafts to cover their buy now, pay later payments</a>.</p>
<p>Third, people typically have just a few credit cards, making it easier to keep track of payments. Buy now, pay later users, on the other hand, usually engage with multiple buy now, pay later lenders through retailers. As a result, it’s difficult for them to keep track of all the buy now, pay later lenders and retailers they made purchases from.</p>
<h2>What are the Canadian governments doing?</h2>
<p>Canada classifies buy now, pay later as an unsecured instalment loan, which means lenders are subject to laws at the federal and provincial levels.</p>
<p>Under federal law, there is an <a href="https://www.sec.gov/Archives/edgar/data/1711291/000171129122000011/curo-20211231.htm">annual interest rate cap of 60 per cent</a>. Provincial laws require buy now, pay later lenders to disclose the cost of credit and extend consumer protection rights to buy now, pay later shoppers. </p>
<p>At the provincial level, <a href="https://www.canada.ca/en/financial-consumer-agency/services/loans/buy-now-pay-later.html">specific laws come into play</a>. Manitoba, Alberta, Québec, and Ontario have passed laws that require lenders to be licensed before they offer these products and be subject to regulatory oversight. </p>
<p>These laws regulate high-cost credit products that have annual rates of 32 per cent or higher. This means buy now, pay later services <em>should</em> fall under this category. However, I found no evidence of buy now, pay later lenders being licensed in Canada. This means either lenders are not aware they fall under these laws, or no one is enforcing them.</p>
<p>This ambiguity over whether or not buy now, pay later lenders are subject to regulatory oversight could be a hindrance for banks like the <a href="https://financialpost.com/fp-finance/fintech/why-higher-interest-rates-threaten-the-buy-now-pay-later-bubble">Bank of Nova Scotia and the Canadian Imperial Bank of Commerce</a>, as it deters them from entering the buy now, pay later market despite its profitability.</p>
<h2>Questions to ask before using buy now, pay later</h2>
<p>Before signing up for a buy now, pay later loan, shoppers should consider the following six questions.</p>
<p><strong>1. Payment structure.</strong> How much of the invoice amount needs to be paid upfront? The norm is typically 25 per cent. What is the number of remaining instalments? The answer to this is usually four. Lastly, what is the frequency of instalments? The norm is biweekly.</p>
<p><strong>2. Sensitive information.</strong> Does the lender require you to provide information about your chequing account? This is sensitive information to give away and puts you at risk of data breaches. Most buy now, pay later lenders withdraw instalment amounts from chequing accounts or debit cards, potentially exposing shoppers to greater risks than credit cards.</p>
<p><strong>3. Interest charges</strong> Does the buy now, pay later lender charge interest on instalment payments? The norm is no.</p>
<p><strong>4. Late fees</strong> How much is the late fee, when does it apply and what is the maximum amount of the late fee? Typically, late fees don’t exceed $8 or one-quarter of the invoice amount. Late fees usually kick in if your scheduled payment remains unpaid after 10 days.</p>
<p><strong>5. Data responsibility.</strong> Who is responsible for your data? Whether it’s the retailer, the buy now, pay later lender or a company whose cloud storage the provider may be using, you should know. In general, the buy now, pay later lender holds this responsibility.</p>
<p><strong>6. Licensing.</strong> Is the buy now, pay later lender licensed to sell the loan? Usually, the <a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2020/03/afterpay-settlement.pdf">answer to this question is no</a>.</p>
<h2>Buy now, pay later regulation</h2>
<p>Two sets of laws and regulations should be implemented to address some of these issues. The first set of regulations focuses on how buy now, pay later lenders interact with consumers. These lenders should clearly communicate <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4359956">all terms and conditions of their loans</a>, including late charges, interest charges and payment schedules, on their platforms to ensure shoppers are fully informed of their financial obligations.</p>
<p>The Financial Conduct Authority in the United Kingdom recently issued guidelines allowing buy now, pay later lenders to <a href="https://www.ft.com/content/ca428bc8-65c3-49ed-8ba6-0d6f206098aa">terminate, suspend or restrict access to shopper accounts</a> for any reason without notice. Effective September 2024, New Zealand will require buy now, pay later lenders to <a href="https://theconversation.com/if-it-looks-like-debt-lets-treat-it-like-debt-buy-now-pay-later-schemes-need-firmer-regulation-in-nz-211820">check a shopper’s credit</a> before providing them a buy now, pay later loan.</p>
<p>The second set of regulations defines the scope and boundaries of buy now, pay later lenders. On Dec. 9, 2022, California became the first American state to <a href="https://dfpi.ca.gov/2022/12/09/buy-now-pay-later-protect-yourself-before-you-check-out/">classify buy now, pay later as a loan</a>. Such classifications allowed California regulators to <a href="https://stateline.org/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans/">question lenders about their transparency in disclosing the terms of their offerings</a>.</p>
<p>The hope is that these laws and regulations will facilitate microlending and not impede the existence of buy now, pay later services, but rather make it safer and more secure for both lenders and users.</p><img src="https://counter.theconversation.com/content/215421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vivek Astvansh has been a member of a team that received funding from the U.S. Environmental Protection Agency.</span></em></p><p class="fine-print"><em><span>Chandan Kumar Behera does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Are buy now, pay later services truly a new way to boost financial inclusion, or just another type of predatory loan?Vivek Astvansh, Associate Professor of Quantitative Marketing and Analytics, McGill UniversityChandan Kumar Behera, PhD Student in Marketing, Indian Institute of Management LucknowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2153102023-10-12T14:48:26Z2023-10-12T14:48:26ZBank CEOs set the tone from the top when it comes to risky behaviour — new research<figure><img src="https://images.theconversation.com/files/553295/original/file-20231011-21-2myd73.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3840%2C2160&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/happy-young-charismatic-coach-business-woman-1636779892">KeyStock/Shutterstock</a></span></figcaption></figure><p>Metro Bank positioned itself as “<a href="https://www.metrobankonline.co.uk/about-us/">a fresh start to banking</a>” when it launched in the wake of the 2008 global financial crisis. It was set up in 2010 as a challenger to the “big five” banks dominating the UK market post-crisis: HSBC, NatWest, Lloyds, Barclays and Santander.</p>
<p>But more recently, Metro Bank has <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">caused concern</a> among its investors for not meeting regulatory requirements on its capital levels. These rules dictate the amount of capital the bank must hold based on the riskiness of its assets, so that it can still operate but also meet any customer withdrawal requests. The riskier the bank’s activities, the more capital it must have on hand. </p>
<p>Regulators use such rules to ensure that banks are keeping people’s money safe. Banks can also help by creating a culture that doesn’t value excessive risk-taking. Our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">new research</a> shows the extent to which top executives at banks set the tone on risk-taking. The way CEOs and even CFOs talk about risk can offer insights into a bank’s likely financial stability. A more relaxed attitude could be a valuable early warning sign of potential bank distress for regulators.</p>
<p>Metro Bank is currently operating normally and there is no reason to think its customer deposits are in danger. It has secured new financing, and plans to open 11 more branches. But <a href="https://www.fca.org.uk/news/press-releases/fca-fines-metro-bank-plc-decision-notices-two-former-executives">ongoing struggles</a> with regulatory capital levels means its <a href="https://www.fitchratings.com/research/banks/fitch-places-metro-bank-holdings-on-rwn-due-to-capital-constraints-04-10-2023">business model is still being questioned</a> by analysts. </p>
<p><a href="https://en.wikipedia.org/wiki/Challenger_bank">Challenger banks</a> like Metro are often <a href="https://www.ft.com/content/a45d50de-f6a1-11e9-9ef3-eca8fc8f2d65">viewed as disadvantaged</a> because they need to keep more money on hand, compared with the UK’s big five. This adds to their costs.</p>
<p>The UK regulator recently rejected Metro Bank’s request to reduce its capital levels, triggering the latest concerns about its stability and causing it to seek more investor funding. The bank subsequently secured this funding, <a href="https://twitter.com/Metro_Bank/status/1711279104308199710">calling it</a> “a new chapter … facilitating the delivery of continued profitable growth over the coming years”.</p>
<h2>Why the regulator won’t relax requirements</h2>
<p>Regulators must maintain a <a href="https://www.bankofengland.co.uk/explainers/what-is-financial-stability">stable financial system</a> that can provide essential services to households and businesses in both good and bad times. Banks are at the heart of this financial system. In the 1980s and 1990s, <a href="https://www.theguardian.com/business/2011/oct/09/big-bang-1986-city-deregulation-boom-bust">deregulation</a> destabilised the industry and led to the 2008 global financial crisis. Many people <a href="https://www.theguardian.com/business/2008/oct/15/unemploymentdata-recession">lost their jobs</a> and homes as a result, while <a href="https://www.bankofengland.co.uk/explainers/is-the-global-financial-system-any-safer-than-before">US$15 trillion (£12.2 trillion) of taxpayers’ money</a> was spent globally to prop up the banking sector.</p>
<p>Banks were largely blamed for the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">reckless risk-taking and careless lending</a> that caused the crisis. But regulators also failed to detect it. </p>
<p>Policymakers around the world introduced extensive reforms to banking and financial regulation after 2008, to protect financial stability and avoid a repeat of this economic catastrophe. This explains the current tough stance by regulators towards relaxing rules for organisations such as Metro Bank.</p>
<p>UK financial authorities have even recently <a href="https://www.telegraph.co.uk/business/2022/12/18/bank-england-hits-back-rishi-sunaks-plan-liberate-city-london/">called out</a> UK government plans to ease financial regulations under the <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.2.606">Edinburgh Reforms</a> and to remove the bankers’ bonus cap, in case it encourages more risk-taking by banks.</p>
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Read more:
<a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">Bankers bonus cap: why scrapping it could hurt the UK economy</a>
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<h2>Recent bank failures: a stark reminder</h2>
<p>Regulators, as well as financial market participants, also remain vigilant after the <a href="https://www.theguardian.com/world/2023/mar/17/credit-suisse-silicon-valley-bank">unexpected failure of a number of banks</a> earlier this year. In particular, the collapse of Silicon Valley Bank (SVB) in the US was <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/svb-credit-suisse-turmoil-poses-bank-run-challenge-for-european-regulators-75024480">attributed to poor risk management</a>. It fuelled fears about global financial stability and the possibility of yet another devastating crisis.</p>
<p>However, regulation alone is not enough to mitigate excessively risky behaviour. The attitude to risk that runs through a bank – its risk culture – also matters.</p>
<p>A company’s <a href="https://www.bankingsupervision.europa.eu/press/publications/newsletter/2023/html/ssm.nl230215_3.en.html#:%7E:text=Risk%20culture%20is%20a%20set,on%20the%20risks%20they%20take.">risk culture</a> comprises a set of values, attitudes and behaviour related to the awareness, management and control of risks. It shapes decisions about things like who to lend to, what to invest in, and how to manage the risks that arise as a result. </p>
<p>Most banks’ business models rely on balancing risk management with profit maximisation in this way. But it needs to be done responsibly: signs of poor risk culture, such as <a href="https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2021/organisational-culture-and-bank-risk.pdf?la=en&hash=81DD3E865BC0159475FD10A78AA2293F0379FB8E">excessive risk taking</a> or misconduct, are red flags to regulators and investors. </p>
<figure class="align-center ">
<img alt="Image of Wall Street Journal homepage with headline about SVB failure and image of US treasury secretary Janet Yellen." src="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553296/original/file-20231011-25-2qw88u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Silicon Valley Bank collapsed in March 2023, the second-largest bank failure in US history.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/march-10-2023-silicon-valley-bank-2274268829">Domenico Fornas/Shutterstock</a></span>
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<p>But it’s difficult for outsiders, even regulators, to observe and measure a bank’s risk culture. So, our <a href="https://www.sciencedirect.com/science/article/pii/S0165176523003981?via%3Dihub#bib0018">recent study</a> aimed to quantify the risk culture of 160 US banks, including some of the country’s largest. We did this by analysing the text of conference calls on which their CEOs answered questions about the business from analysts, investors and the media. This allowed us to capture their unscripted views and behaviour when these bank CEOs were put on the spot.</p>
<p>We used a machine learning algorithm to construct a dictionary of words and phrases associated with <a href="https://www.sciencedirect.com/science/article/pii/S0377221719301936#sec0002">seven different risk culture dimensions</a>, including “risk strategy” and “regulatory requirements”. We used another algorithm to assess whether these phrases were being used in a positive or negative way. </p>
<p>Our analysis showed that words and phrases associated with the “regulatory requirements” risk culture dimension, for example, were mentioned the least by CEOs prior to and during the global financial crisis. Unsurprisingly, use of the term picked up in its aftermath, as CEOs had to explain how tightening banking regulations were affecting their businesses. </p>
<p>By calculating the number of positive and negative occurrences of each phrase, we were able to create a measure of CEO attitudes for each risk culture dimension. We found that a weaker risk culture – characterised by more negative mentions of these phrases – indicated a greater probability of bank insolvency as a result of not having enough capital.</p>
<p>More worryingly, we found similarities in attitudes to risk between collapsed US banks SVB and <a href="https://finance.yahoo.com/news/latest-banking-crisis-failures-silicon-133525079.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20v&guce_referrer_sig=AQAAADejPCXiax-rs9nNOkrxJsrN71CJ7V381zRYjTDy9eYNcPJ8Mq9HnyyU0jjZKlFddz7olRknKwKo7GWAPh6LeLUFdxmWrNkEElEVs-Qz42kYJvuXNTr4u-sy0cXQsGxjHHQnEgn4N8MWDjKIV9un7wBDx29mkaksHbhsfN-3nuvH">First Republic</a>, and other US banks that are still operating today. </p>
<p>Our research indicates that a strong risk culture in banking starts with the right tone from the top. Executives should be aware of their role model status when making decisions and talking about risk, both within their companies and to the public. Their attitudes cascade down to every other level and, if they are serious about managing risk, this could help maintain financial stability not only of their own bank, but the financial sector as a whole.</p><img src="https://counter.theconversation.com/content/215310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Our study shows the way bank bosses talk about risk can negatively affect financial stability.Alper Kara, Professor of Banking and Finance, Brunel University LondonArtur Semeyutin, Senior Lecturer in Economics, University of HuddersfieldSaid Kaawach, Lecturer in Economics and Finance, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2073322023-06-16T14:52:20Z2023-06-16T14:52:20ZUS regulators continue crypto crackdown – but here’s why the latest charges are different<figure><img src="https://images.theconversation.com/files/532215/original/file-20230615-13202-uuij1l.jpg?ixlib=rb-1.1.0&rect=92%2C53%2C5002%2C3304&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Binance is one of several crypto firms that have been sued by US regulators recently.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/calgary-ab-canada-feb-22-2022-2129352677">oasisamuel/Shutterstock</a></span></figcaption></figure><p>The US Securities and Exchange Commission (SEC) sued the cryptocurrency platform Coinbase shortly after launching a lawsuit against the world’s largest cryptocurrency exchange, Binance. </p>
<p>This isn’t the first time Binance and Coinbase have caught <a href="https://theconversation.com/what-binances-us-lawsuit-says-about-the-future-for-cryptocurrency-regulation-202930">the SEC’s attention – it’s not even the first time this year</a>. But <a href="https://www.sec.gov/news/press-release/2023-102">the latest charges</a> are much more <a href="https://www.sec.gov/news/press-release/2023-101">serious</a>, including accusations that the exchanges are operating without the correct registration. </p>
<p>Both cases boil down to whether or not cryptocurrency tokens should be classed as “securities”, like stocks, and regulated in the same way. Binance and Coinbase have spoken out in support of regulation. And many <a href="https://www.coindesk.com/consensus-magazine/2023/05/10/we-need-regulatory-clarity-to-keep-crypto-exchanges-onshore-and-defi-permissionless/">crypto firms believe</a> that by taking legal action instead of creating clear rules, the SEC has failed to provide the industry with enough guidance, leading to uncertainty for people and businesses.</p>
<p>Since Gary Gensler became chair of the SEC in April 2021, he has regularly testified before Senate committees on the need for <a href="https://www.cnbc.com/2021/09/15/sec-chair-gensler-says-regulator-is-short-staffed.html">more staff</a> to regulate cryptocurrencies, calling the market a “<a href="https://www.c-span.org/video/?514606-1/securities-exchange-commission-oversight-hearing">wild west</a>”. On the other hand, he has also said he has no plans to <a href="https://www.cnbc.com/2021/10/06/bitcoin-jumps-to-nearly-5-month-high-topping-55000-on-wednesday.html">ban cryptocurrencies</a>, while the SEC approved the first <a href="https://theconversation.com/bitcoin-why-its-value-has-rocketed-once-again-170396">Bitcoin ETF</a> in 2021, as well as <a href="https://theconversation.com/coinbase-is-listing-for-us-100-billion-on-nasdaq-but-you-might-be-better-buying-bitcoin-instead-158843">Coinbase’s stock exchange listing</a> that same year.</p>
<p>But now the SEC has filed <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/">13 charges against Binance</a> and its founder Changpeng Zhao, as well as a motion to <a href="https://www.reuters.com/legal/sec-files-motion-restraining-order-freeze-binance-us-assets-2023-06-06/">freeze assets</a> belonging to Binance’s US affiliate (Binance is based in the Cayman Islands). The SEC has also accused both Binance and Coinbase of operating unregistered exchanges, and offering the sale of unregistered securities in the form of crypto tokens.</p>
<p><a href="https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402">Binance has pledged</a> to vigorously defend itself against the lawsuit, which it said reflected the SEC’s “misguided and conscious refusal” to provide guidance and clarity on regulation to the cryptocurrency industry. </p>
<p>Coinbase’s chief legal officer said <a href="https://www.cnbc.com/2023/06/12/coinbase-sued-by-sec-over-alleged-unregistered-securities.html">in a statement to CNBC</a> about the charges that “the SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance”.</p>
<p>He called for legislation that “allows fair rules for the road to be developed transparently and applied equally, not litigation”.</p>
<h2>Counting the costs</h2>
<p>These cases are similar to another brought against <a href="https://www.cnbc.com/2023/05/08/ripple-will-have-spent-200-million-fighting-sec-lawsuit-ceo-says.html#:%7E:text=In%202020%2C%20the%20U.S.%20Securities,registering%20it%20as%20a%20security.">a crypto company called Ripple Labs</a> by the SEC in December 2020. It argues that XRP, Ripple’s cryptocurrency token, is an unregistered security. Ripple disputes this and expects to spend US$200 million (£156 million) fighting the suit, <a href="https://www.cnbc.com/2023/05/08/ripple-will-have-spent-200-million-fighting-sec-lawsuit-ceo-says.html#:%7E:text=In%202020%2C%20the%20U.S.%20Securities,registering%20it%20as%20a%20security.">according to its CEO</a>. He argues such cases are preventing US innovation around the blockchain technology that powers crypto trading.</p>
<p>At the heart of this case is the question of whether Ripple’s token satisfies <a href="https://www.investopedia.com/terms/h/howey-test.asp">the Howey test</a>, which would deem it a security, just like a stock or a bond, for regulation purposes. The test sets out three key criteria for deciding whether a financial product should come under securities regulations:</p>
<ul>
<li>it is a financial investment, meaning that participants in the transaction must be risking their own money </li>
<li>it is a shared enterprise, so the financial success of investors should be somehow connected</li>
<li>there is an expectation of profits solely from the effort of others.</li>
</ul>
<p>According to <a href="https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets">the SEC</a>, the first criterion is easily satisfied with crypto because fiat money or other digital assets are being exchanged. Likewise, the “common enterprise” test is also easily met when trading cryptocurrencies. The third criterion largely turns on whether digital assets come with an “expectation of profit to be derived <em>from the efforts of others</em>”.</p>
<h2>Why does this matter?</h2>
<p>The most recent SEC lawsuits against Binance and Coinbase go after the lifeblood of the cryptocurrency industry: the exchanges or platforms on which people trade, as opposed to the individual digital assets or tokens. These platforms enable investors to buy and sell cryptocurrencies easily without the need for expert knowledge of how blockchains work. </p>
<p>The lawsuits have had an immediate and significant impact on crypto values. Coinbase customers pulled about US$1.28 billion from the exchange after the news broke, according to initial estimates from data firm <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/">Nansen</a>. Coinbase’s parent company, Coinbase Global Inc <a href="https://www.reuters.com/legal/us-sec-sues-coinbase-over-failure-register-2023-06-06/#:%7E:text=Shares%20of%20Coinbase's%20parent%20Coinbase,%22demonstrated%20commitment%20to%20compliance.%22">(COIN.O)</a>, saw its shares close down US$7.10, or 12.1%, at US$51.61, after falling as much as 20.9% earlier on the day the charges were announced. </p>
<p>In the meantime, customers <a href="https://www.reuters.com/technology/crypto-exchange-binance-hit-by-outflows-780-mln-last-24-hours-nansen-2023-06-06/">withdrew around US$780 million</a> from Binance and its US affiliate in the 24 hours following the lawsuit, according to Nansen. The Bitcoin market has rallied since, although Binance.US has <a href="https://cointelegraph.com/news/binance-us-halts-trading-for-dozens-of-usdt-btc-busd-pairs-amid-sec-lawsuit">stopped trading</a> in a number of its cryptocurrencies.</p>
<p>These latest lawsuits look like US regulators are drawing a line in the sand. If successful, these cases will limit US investors’ access to assets on these platforms and will also create further market uncertainty for companies and people. </p>
<figure class="align-center ">
<img alt="Blue screen with white ripple logo in background, foreground image is a phone that says " src="https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/532212/original/file-20230615-21-1e126f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Ripple Labs was charged by the SEC in 2020.</span>
<span class="attribution"><span class="source">Grey82/Shutterstock</span></span>
</figcaption>
</figure>
<h2>Global coordination on crypto rules</h2>
<p>Research shows <a href="https://www.pewresearch.org/short-reads/2023/04/10/majority-of-americans-arent-confident-in-the-safety-and-reliability-of-cryptocurrency/">around 17% of people</a> in the US have traded, invested in or used a cryptocurrency. If the crackdown by regulators cuts their access, these people may be able to use centralised exchanges in other countries, decentralised exchanges, or other means to trade cryptocurrencies.</p>
<p>But regulators in other major financial markets could follow the SEC’s lead when it comes to crypto rules. The UK’s Financial Conduct Authority recently announced <a href="https://www.fca.org.uk/news/press-releases/fca-introduces-tough-new-rules-marketing-cryptoassets">new regulations for cryptocurrency</a> firms operating in the country. This includes measures to ensure investors know the risks involved, that adverts are clear and not misleading, as well as a ban on “refer a friend” bonuses. But these rules will only affect the marketing of cryptocurrencies in the UK, so it’s a relatively small step. </p>
<p>Cryptocurrency providers seem to want regulation to provide legitimacy and clear parameters in which to work. Given the borderless nature of cryptocurrencies, regulators need to align internationally or exchanges will simply move to “friendlier” jurisdictions. Global leadership is needed to establish how – and if – cryptocurrencies should be regulated. Without this, regulators like the SEC will struggle to corral the growing global crypto market.</p><img src="https://counter.theconversation.com/content/207332/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrency.</span></em></p>Crypto platforms are calling for clear regulations rather than lawsuits from regulators.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1994502023-06-07T16:43:40Z2023-06-07T16:43:40ZHow cashless societies can boost financial inclusion – with the right safeguards<figure><img src="https://images.theconversation.com/files/529827/original/file-20230602-27-pq5zrq.jpg?ixlib=rb-1.1.0&rect=60%2C60%2C5702%2C3767&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Accepting digital payments.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/smiling-auto-driver-showing-qr-barcode-2114566886">WESTOCK PRODUCTIONS/Shutterstock</a></span></figcaption></figure><p>Cashless societies, where transactions are entirely digital, are gaining traction in many parts of the world, particularly after <a href="https://www.worldbank.org/en/news/feature/2022/07/21/covid-19-boosted-the-adoption-of-digital-financial-services">a pandemic-era boom in demand for online banking</a>. </p>
<p>Improvements in digital payment infrastructure such as mobile payments, digital currencies and online banking, make it more convenient for people and businesses to buy and sell things without using cash. Even the Bank of England is looking into how a <a href="https://www.bankofengland.co.uk/the-digital-pound">digital pound</a> might work, showing the potential for a significant shift from physical cash to digital payments in the UK.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-a-digital-pound-could-work-alongside-cryptocurrencies-199462">How a digital pound could work alongside cryptocurrencies</a>
</strong>
</em>
</p>
<hr>
<p>Fintech companies have accelerated the transition towards cashless payments with innovations including mobile payment apps, digital wallets, cryptocurrencies and online banking services. The COVID pandemic was also <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3794790">a tipping point</a> that created <a href="https://www.worldbank.org/en/news/feature/2022/07/21/covid-19-boosted-the-adoption-of-digital-financial-services">unprecedented appetite for digital transactions</a>. Fintechs emerged as a life line for many during lockdowns, particularly vulnerable populations that needed <a href="https://www.gpfi.org/sites/gpfi/files/sites/default/files/5_WB%20Report_The%20impact%20of%20COVID-19%20on%20digital%20financial%20inclusion.pdf">emergency lines of credit and ways to make and receive payments</a>. </p>
<p>By 2021, <a href="https://www.worldbank.org/en/news/feature/2023/02/02/latest-global-findex-data-chart-10-years-of-progress-in-financial-inclusion">approximately 71% of adults in developing countries had bank accounts</a>. But this leaves nearly 30% of the population still needing access to essential financial products and services. Fintechs can provide more affordable and accessible financial services and products. This helps boost financial inclusion, particularly for the “unbanked”, or those without a bank account. </p>
<p>In the UK, <a href="https://www.money.co.uk/guides/unbanked-what-its-like-not-to-have-a-bank-account">around 1.3 million people</a>, roughly 4% of the population, lack access to banking services. The government and financial institutions have worked together to promote the adoption of digital payments, and the UK’s <a href="https://www.requesttopay.co.uk/">Request to Pay service</a> allows people and businesses to request and make payments using digital channels such as Apple Pay and Google Pay. </p>
<p>But other countries are moving faster towards a cashless society. In Sweden, only about <a href="https://worldpay.globalpaymentsreport.com/en">10% of all payments were made in cash in 2020</a>. This move towards cashless payments in the country has been facilitated by mobile payment solutions like <a href="https://www.swish.nu/about-swish">Swish</a>, which people can use to send and receive money via mobile phone. </p>
<h2>Boosting financial inclusion</h2>
<p>India has gone <a href="https://www.economist.com/special-report/2023/05/15/a-digital-payments-revolution-in-india">even further</a>. In less than a decade, the country has become <a href="https://www.forbes.com/sites/tomgroenfeldt/2022/10/23/india-is-a-digital-finance-leader-and-poised-for-explosive-growth/?sh=246baed41d0d">a digital finance leader</a>. It has also made significant progress in promoting <a href="https://bfsi.economictimes.indiatimes.com/news/policy/jan-dhan-3-0-digital-banking-micro-insurance-among-top-focus-areas/87885159">digital financial inclusion</a>, mainly through the government’s flagship programme, the Pradhan Mantri Jan Dhan Yojana (<a href="https://www.pmjdy.gov.in/scheme">PMJDY</a>). </p>
<p>India’s banks also participate in mobile payment solutions like Unified Payments Interface (<a href="http://cashlessindia.gov.in/upi.html">UPI</a>), which can connect multiple accounts via one app. India’s digital infrastructure, known as <a href="https://www.imf.org/en/Publications/WP/Issues/2021/02/26/Indias-Approach-to-Open-Banking-Some-Implications-for-Financial-Inclusion-50049">the India Stack</a> also aims to expand financial inclusion by encouraging companies to develop fintech solutions.</p>
<p>Many developing economies are <a href="https://blogs.worldbank.org/voices/expanding-digital-financial-services-can-help-developing-economies-cope-crisis-now-and-boost-growth-later">using digitalisation to boost financial inclusion</a> in this way. Kenya introduced its <a href="https://www.vodafone.com/about-vodafone/what-we-do/consumer-products-and-services/m-pesa">M-Pesa mobile money service</a> in 2007. While microfinance institutions that provide small loans to low-income individuals and small businesses were first introduced in Bangladesh in the 1970s via the <a href="https://grameenbank.org/">Grameen Bank</a> project. </p>
<p>Digital lending <a href="https://www.statista.com/statistics/1202533/india-digital-lending-volume/">has also grown in India</a> in recent years. Its fintechs use algorithms and data analytics to assess creditworthiness and provide loans quickly and at a lower cost than traditional banks. </p>
<p>These innovative platforms have helped to bridge the gap between the formal financial system and underserved populations – those with low or no income – providing fast access to financial services. By removing barriers such as high transaction costs, lack of physical branches and some credit history requirements, fintech companies can reach a wider range of customers and provide financial services that are tailored to their needs. </p>
<p>It’s the tech behind these systems that helps fintechs connect with their customers. The increased use of digital payment methods generates a wealth of data to gain insights into consumer behaviour, spending patterns and other relevant information that can be used to further support a cashless society. </p>
<h2>Helping the UK’s unbanked</h2>
<p>Countries like the UK could also promote digital financial inclusion to help unbanked people. But this would require a combination of government support, innovation and the widespread adoption of mobile payment solutions. </p>
<p>There are some significant challenges to overcome to create a true – and truly fair – cashless economy. For example, a cashless system could exclude people who do not have access to digital payment methods, such as the elderly or low-income populations. According to a recent study by Age UK, <a href="https://uk.sports.yahoo.com/news/two-five-over-65s-bank-230100907.html">75% of over 65s with a bank account</a> said they wanted to conduct at least one banking task in person at a bank branch, building society or post office. </p>
<p>Providing more cashless options could also increase the risk of cybercrime, digital fraud such as phishing scams and data breaches – particularly among people that aren’t as financially literate. </p>
<p>There is a dark side to fintech: algorithm biases and predatory lending practices negatively affect <a href="https://www.elibrary.imf.org/view/journals/001/2022/080/article-A001-en.xml?rskey=fjtbht&result=16">vulnerable and minority groups as well as women</a>. Even major financial firms such as Equifax, Visa and Mastercard <a href="https://www.businessinsider.com/visa-and-mastercard-alert-consumers-about-equifax-data-breach-2017-9?r=US&IR=T">can get compromised</a> by data breaches, creating valid concerns about data security for many people. </p>
<p>Cross-border transfer of personal data by fintech companies also concerns regulators, but there is still a lack of internationally recognised data protection standards. This <a href="https://link.springer.com/chapter/10.1007/978-3-031-11954-5_3">should be addressed</a> as the trend towards cashless societies continues.</p>
<figure class="align-center ">
<img alt="Two hands hold a fan of GBP banknotes: £5, £10, £20, £50." src="https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/529828/original/file-20230602-27-zmqc5a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Paying with cash.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pounds-banknotes-held-by-mans-hands-1958384521">Nieves Mares/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Building guardrails</h2>
<p>Regulations affect how fintech companies can provide financial services but ensure they operate within the law. Since fintech companies generally aim to disrupt markets, however, this can create a complex relationship with regulators. </p>
<p>Collaboration between regulators and fintech companies will boost understanding of these innovative business models and help shape future regulatory frameworks. Countries like India have shown the way in this respect. An <a href="https://www.fca.org.uk/firms/innovation">innovation hub run by UK regulator the Financial Conduct Authority</a> is a good start. It supports product and service launches and offers access to synthetic data sets for testing and development. </p>
<p>Fintech can help finance become more inclusive. But it needs policies and regulations that support innovation, promote competition, ensure financial stability and – most importantly – to help protect the citizens of these new cashless societies.</p><img src="https://counter.theconversation.com/content/199450/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thankom Arun does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The UK could learn a lot from developing economies about using digital payments to boost financial inclusion.Thankom Arun, Professor of Global Development and Accountability, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029302023-04-04T15:55:03Z2023-04-04T15:55:03ZWhat Binance’s US lawsuit says about the future for cryptocurrency regulation<figure><img src="https://images.theconversation.com/files/519085/original/file-20230403-18-dz8zcn.jpg?ixlib=rb-1.1.0&rect=278%2C114%2C5037%2C3489&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/apple-iphone-binance-logo-dollars-cryptocurrency-1183270174">Primakov/Shutterstock</a></span></figcaption></figure><p>The world’s <a href="https://coinmarketcap.com/rankings/exchanges/">largest cryptocurrency exchange</a>, Binance, has been hit with a lawsuit by US regulator the <a href="https://www.cftc.gov/PressRoom/PressReleases/8680-23">Commodity Futures Trading Commission (CFTC)</a>. This is not the first time a cryptocurrency exchange has been charged by a regulator. But this particular case involves a regulator that does not directly oversee cryptocurrencies. This indicates how regulators – particularly those in the US – hope to clamp down on the cryptocurrency industry.</p>
<p>The CFTC’s lawsuit alleges that Binance violated US derivatives laws by offering its derivative trading services to US customers without registering with the right market regulators. It says Binance has prioritised commercial success over regulatory compliance. </p>
<p>The CFTC has also levied charges against Binance’s founder and CEO, Changpeng Zhao (known as CZ) and former chief compliance officer Samuel Lim. They are charged with taking steps to violate US laws, including directing US-based “VIP customers” to open Binance accounts under the name of shell companies. The regulator has pointed to <a href="https://fortune.com/2023/03/27/crypto-exchange-binance-crackdown-cftc-complaint-chat-messages-crime/">chat messages</a> as evidence of CZ and Sim’s <a href="https://www.theguardian.com/business/2023/apr/01/from-hamas-warnings-to-vip-perks-and-criminal-clients-the-us-regulators-claims-against-binance">knowledge of</a> various criminal groups using the exchange.</p>
<p>People visit Binance nearly 15 million times a week to trade on the over 300 cryptocurrencies it offers in more than <a href="https://coinmarketcap.com/rankings/exchanges/">1,600 different markets</a>. CZ is an outspoken advocate for cryptocurrencies and regularly tweets about the industry and his company. He even tweeted a link to <a href="https://twitter.com/cz_binance/status/1640483997288415234?s=61&t=unBQH4shXcEZjF1GwnZECQ">his initial response to the recent CFTC charges</a>, which he called “unexpected and disappointing”. Promising full responses in due time, he said:</p>
<blockquote>
<p>Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.</p>
</blockquote>
<p>Last year CZ’s tweets arguably contributed to <a href="https://theconversation.com/cryptocurrencies-why-binances-failed-ftx-rescue-deal-could-mean-crypto-winter-is-coming-194313">the collapse of FTX</a>, one of his company’s main rivals. Binance saw its <a href="https://www.ft.com/content/1fb69ad6-0c1a-4ebd-b2ea-720dc422eeb7">market share grow</a> following FTX’s collapse. </p>
<p>So, this charge – against not only a crypto giant but also the company of an outspoken industry advocate – has created further upheaval in a market that has already suffered <a href="https://www.techtarget.com/whatis/feature/Crypto-winter-explained-Everything-you-need-to-know">multiple crises</a> in the last year. Investors <a href="https://www.reuters.com/legal/investors-pull-16-billion-binance-after-cftc-lawsuit-2023-03-29/">withdrew a reported US$1.6 billion</a> (£1.3 billion) from Binance within days of the CFTC’s announcement of its charges. These outflows could continue if US regulators tighten their squeeze on crypto companies further, causing major players like Binance to shift focus to other jurisdictions.</p>
<h2>Creeping oversight</h2>
<p>The <a href="https://www.usa.gov/federal-agencies/u-s-commodity-futures-trading-commission#:%7E:text=The%20Commodity%20Futures%20Trading%20Commission,sound%20futures%20and%20option%20markets.">CFTC aims</a> to “protect the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets”. Previous actions by this regulator in 2021 against <a href="https://cointelegraph.com/news/cftc-slaps-tether-and-bitfinex-with-a-combined-42-5-million-fine">Tether and Bitfinex</a> resulted in major fines and a loss of credibility for the crypto industry. </p>
<p>But a statement <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement101521">published at the time</a> by one of the CFTC’s five commissioners, Dawn Stump, pointed out that the CFTC doesn’t actually have responsibility for regulating cryptocurrencies. She warned that these fines might “cause confusion about the CFTC’s role in this area”. She said the action was based on defining stablecoins (a type of cryptocurrency) as a commodity, but: “we should seek to ensure the public understands that we do not regulate stablecoins and we do not have daily insight into the businesses of those who issue such”.</p>
<p>These latest charges against Binance focus on its activities in derivatives – financial contracts that are linked to the value of an asset such as oil or, in this case, cryptocurrencies. This is a market the CFTC does regulate.</p>
<p>Another US financial regulator, the Securities and Exchange Commission (SEC), has also been ramping up its crypto oversight activities. As well as focusing on the <a href="https://www.sec.gov/securities-topic/ICO">Initial Coin Offering market</a>, it saw <a href="https://www.cornerstone.com/insights/press-releases/sec-tightens-cryptocurrency-enforcement/">a 50% increase in enforcement actions</a> against digital asset companies last year compared to 2021.</p>
<figure class="align-center ">
<img alt="Black and gold emblem of the US Commodity Futures Trading Commission in Washington, DC, brick wall background." src="https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/519105/original/file-20230403-16-am1xxg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The US Commodity Futures Trading Commission logo outside its headquarters in Washington DC.</span>
<span class="attribution"><span class="source">Mark Van Scyoc/Shutterstock</span></span>
</figcaption>
</figure>
<h2>Crypto market changes</h2>
<p>So, Binance is up against two powerful US financial regulators. Some <a href="https://cointelegraph.com/news/binance-vs-cftc-latest-court-battle-could-alter-crypto-landscape-in-us">experts have warned that</a> “significant regulatory action could prompt Binance to increasingly shift its business operations beyond the United States”. Certainly, the fact that Binance held a <a href="https://assets.ctfassets.net/4rilomtvvae4/6SExqAaqYIwlHl7FuT1VBH/7231fe008c6c984d4756d6b8f163c262/Ahead_of_the_curve_-_Jan_3_2023.pdf">92%</a> share of the crypto market at the end of 2022 means it facilitates many transactions and offers a lot of liquidity to traders around the world, including in the US.</p>
<p>A trader’s capacity to find competitive prices when buying and selling, as well as sources of liquidity (or other people to trade with) would be affected by the loss of or pull back of <a href="https://www.forbes.com/advisor/investing/cryptocurrency/binance-us-review/">one of the world’s top ten crypto exchanges</a>. This would be bad news for retail and institutional investors who could be confronted with a smaller and potentially more expensive market as a result.</p>
<p>And even if the complaints and investigations by the CFTC and SEC take a while to conclude, as is likely, the US legislature may step in before that. A report published by the Financial Times days after the CFTC announcement alleges that Binance has hidden <a href="https://www.ft.com/content/4d011d5a-37ae-435a-9c7d-a163b4c92308">links to China</a> for many years. A statement issued by the the exchange to the FT said this is not “an accurate picture of Binance’s operations” and that the paper’s sources were “citing ancient history (in crypto terms)”.</p>
<p>But recent actions against <a href="https://www.reuters.com/world/us/us-lawmakers-introduce-bill-restrict-huaweis-access-banks-2022-12-14/">Chinese tech company Huawei</a> and <a href="https://edition.cnn.com/2023/03/07/tech/senators-bill-tiktok-ban/index.html">social media platform Tiktok</a> indicate political leaders are keen to crack down on Chinese companies’ access to US technology systems and customer data. So any similar concerns could lead US politicians to start acting in this area as well.</p><img src="https://counter.theconversation.com/content/202930/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p><p class="fine-print"><em><span>Hossein Jahanshahloo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>US regulators are beginning bringing more enforcement actions against crypto firms, with the latest targeting top exchange Binance.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingHossein Jahanshahloo, Assistant Professor in Finance, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2023772023-03-28T13:52:21Z2023-03-28T13:52:21ZWhat central banks are doing to safeguard financial stability and why they must proceed with caution<figure><img src="https://images.theconversation.com/files/517781/original/file-20230327-24-8f7acl.jpg?ixlib=rb-1.1.0&rect=284%2C163%2C5458%2C3518&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trying to maintain some stability.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/abstract-businesswomen-fail-danger-tower-block-1934517353">David Gyung/Shutterstock</a></span></figcaption></figure><p>Before a crucial <a href="https://theconversation.com/interest-rates-why-the-federal-reserve-and-bank-of-england-should-still-raise-them-a-bit-202156">week of interest rate decisions</a> for central banks, and on the eve of the emergency takeover of <a href="https://www.politico.eu/article/swiss-finance-minister-defends-rushed-takeover-of-credit-suisse/">banking giant Credit Suisse</a>, the Bank of England and five other major central banks announced a coordinated effort to <a href="https://www.bankofengland.co.uk/news/2023/march/coordinated-central-bank-action-to-enhance-the-provision-of-us-dollar-liquidity">boost the flow of US dollars</a> through the global financial system. </p>
<p>Their aim was to keep credit flowing to businesses and households during recent banking sector turmoil. This had to coincide with <a href="https://theconversation.com/interest-rates-why-the-federal-reserve-and-bank-of-england-should-still-raise-them-a-bit-202156">ongoing attempts to control inflation</a> amid market chaos. </p>
<p>The measure implemented by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the US Federal Reserve extended existing arrangements called <a href="https://www.newyorkfed.org/markets/international-market-operations/central-bank-swap-arrangements">“liquidity swaps”</a> by increasing the frequency with which these central banks can exchange US dollars, from weekly to daily, at least until the end of April 2023.</p>
<p>Liquidity swap agreements are an important channel through which US dollars are made readily available to all major countries. The change in frequency from weekly to daily is designed to shore up stability. But <a href="https://www.imf.org/en/News/Articles/2023/03/25/032623md-china-development-forum-remarks">uncertainty remains</a> about whether the financial system has recovered from recent turmoil, and such tools still carry risks.</p>
<h2>What are liquidity swaps?</h2>
<p>Liquidity swap agreements are commonly used to enable central banks to exchange currencies using an agreement based on collateralised loans. They allow a central bank (the recipient) to obtain foreign currency from another (the source) and distribute it to commercial banks in their own country. </p>
<p>Agreements are often reciprocal, in that there is a two-way liquidity line and either bank can take up the recipient or source role. Central banks have a multitude of these agreements in place at any one time with other key central banks.</p>
<p>The reason for the recent increase in the availability of US dollars through these agreements is that the dollar is the dominant global currency. It plays a large role in trade and comprises significant chunks of <a href="https://www.imf.org/en/Publications/WP/Issues/2020/06/19/The-Non-U-S-Bank-Demand-for-U-S-49514">investors’ portfolio holdings</a>. </p>
<p>Of course, commercial banks have assets and liabilities denominated in many different currencies. But it’s not unheard of for <a href="https://www.bis.org/publ/qtrpdf/r_qt2103c.pdf">non-US banks to have large – sometimes even roughly the same – amounts </a> of US dollar-denominated assets as US banks. </p>
<p>So, these liquidity lines provide a way for commercial banks to get a currency they need but that their central bank may not have in abundance. Without this tool, non-US banks would have to acquire US dollars through their own markets or by lending in non-US markets in exchange for US dollars.</p>
<p>But any stress in the market, such we have seen recently with Credit Suisse, can lead to increased demand for cash as investors try to safeguard their assets. Because of the dominance of the US dollar in the global financial system, this can cause a shortage of dollars available to non-US banks. These banks then have to turn to their own central banks for US dollars – and this is where swap lines come in.</p>
<figure class="align-center ">
<img alt="Lifebuoy and a golden dollar symbol on blue sea and sky background." src="https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&rect=0%2C431%2C4985%2C2389&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517778/original/file-20230327-1567-t9nqnd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Plain sailing ahead?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/money-crisis-rescue-lifebuoy-golden-dollar-597807614">rawf8/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Lender of last resort</h2>
<p>In a world of interconnected markets, negative financial events can spread quickly. Coordinated movements by central banks remind everyone that they can and will act as a lender of last resort.</p>
<p>The chart below shows the weekly average amount of US dollars transacted through these liquidity lines. These trades tend to increase during adverse times, such as between 2008 and 2010 due to the global financial crisis, and in 2020 at the beginning of the COVID pandemic. </p>
<p><strong>Use of USD central bank liquidity swaps:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line graph showing use of central bank USD swap facilities, with significant increases during the 2008 global financial crisis and the COVID pandemic." src="https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=541&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=541&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=541&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=680&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=680&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517859/original/file-20230328-3042-vnwa4n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=680&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">USD central bank liquidity swaps (2005-2020).</span>
<span class="attribution"><a class="source" href="https://www.newyorkfed.org/markets/desk-operations/central-bank-liquidity-swap-operations">Author provided using data from the board of governors of the Federal Reserve System.</a></span>
</figcaption>
</figure>
<p>So, when central banks boost accessibility to dollars through these liquidity lines – as they are now – it suggests they are concerned about whether weekly access to US dollars is enough. In other words, when they have growing concerns about financial stability, they want to remind markets that they will act as a lender of last resort.</p>
<p>For the recipient central banks, the active lines can help prevent costly bank failures and can dampen domestic concerns about bank runs. For the source (typically the Federal Reserve), the liquidity lines maintain demand for US-denominated assets and prevent spikes in interest rates, which in turn supports US interests. </p>
<p>But this gives rise to another problem: moral hazard. The increasing frequency of liquidity lines can act like a subsidy for US dollar-based activities. Excessive amounts of this behaviour can in turn cause more instability even as central banks are trying to calm markets with these tools. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-does-moral-hazard-mean-a-scholar-of-financial-regulation-explains-why-its-risky-for-the-government-to-rescue-banks-202091">What does 'moral hazard' mean? A scholar of financial regulation explains why it's risky for the government to rescue banks</a>
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<h2>Financial (in)stability</h2>
<p>And moral hazard is not the only kind of risk these tools carry – liquidity lines can act as a useful medicine, but they do have side effects. There are two key components to a liquidity line that determines the potential risk to, and broader effect on, the financial system. </p>
<p>The first comes from the way they are agreed between central banks, and the second comes from how the recipient central bank passes the US dollars from the swap on to commercial banks in its own country. A recipient central bank is solely responsible for paying the source central bank for the US dollars, so the source central bank does not know the identity of the beneficiary banks in the commercial markets. </p>
<p>This creates supervisory and regulatory problems because the source is not able to regulate the foreign commercial banks that access these swaps via recipient banks. All central banks have their own incentives and rules around how and why they operate. So, this exposes a central bank to any risks arising from the decisions made by banks in other jurisdictions, some of which will operate based on different incentives and oversight.</p>
<p>This is why central banks need to use such tools with caution, particularly when they are trying to encourage stability. Liquidity lines can actually cause fires started in one country to spread through others, which could destabilise the global financial markets.</p><img src="https://counter.theconversation.com/content/202377/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Drew Woodhouse does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Central banks are reaching into their toolkits to shore up the global financial system.Drew Woodhouse, Senior Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2022952023-03-24T11:05:40Z2023-03-24T11:05:40ZSoaring interest rates contributed to recent bank failures – and there could be more to come<figure><img src="https://images.theconversation.com/files/517158/original/file-20230323-14-y9u8dd.jpg?ixlib=rb-1.1.0&rect=60%2C0%2C6687%2C4404&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/abstract-view-skyline-london-modern-skyscrapers-1140269726">Sven Hansche/Shutterstock</a></span></figcaption></figure><p>US bank regulators closed Silicon Valley Bank (SVB) on March 10 2023, after it suffered <a href="https://www.ft.com/content/b556badb-8e98-42fa-b88e-6e7e0ca758b8">US$42 billion (£35 billion) of deposit withdrawals</a> in a 24-hour period. This was <a href="https://www.reuters.com/business/finance/global-markets-banks-wrapup-1-2023-03-10/">the largest bank failure</a> since the 2008 global financial crisis and was not supposed to happen again. </p>
<p>Since the 2008 crisis, international bank regulations have been <a href="https://www.bis.org/publ/work859.htm">greatly tightened</a> and, among other measures, banks now have more capital to absorb losses and protect themselves from insolvency. Yet, even though SVB’s capital was above the minimum level required by regulators, this was not enough to keep it alive.</p>
<p>The SVB debacle has caused new concern about the safety of banks across the developed world, raising the likelihood of a run on deposits in any bank that has been showing signs of weakness. This sense of alarm was heightened by the collapse of Credit Suisse and its subsequent takeover by UBS just ten days after SVB’s failure. <a href="https://www.spglobal.com/spdji/en/indices/equity/dow-jones-us-banks-index/#overview">The Dow Jones index of US bank shares</a> fell by 22% in the two weeks from March 6.</p>
<p>Even though central banks have been providing “<a href="https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/what-is-a-lender-of-last-resort.en.html#:%7E:text=A%20lender%20of%20last%20resort%20is%20whoever%20you%20turn%20to,need%20for%20their%20daily%20business.">lender of last resort</a>” facilities <a href="https://www.reuters.com/markets/us/banks-sought-record-fed-liquidity-wake-svb-collapse-2023-03-16/">to assist banks with their cash flows</a>, the major worry is that vulnerable banks may need capital injections from government to avoid failure. </p>
<p>This is what happened in 2008, but post-crisis banking regulation was supposed to prevent the need for such assistance. And so SVB’s troubles are a reminder that the current rules on capital have been designed to cushion banks against losses on defaulting loans. While this was the predominant cause of bank failures after the 2008 financial crisis, default risk was not a major issue for SVB. Its troubles stemmed from falling asset values as interest rates rose. This is known as interest rate risk. </p>
<h2>SVB’s interest rate risk</h2>
<p>As a specialist bank to the technology industry, deposits at SVB grew <a href="https://ir.svb.com/financials/annual-reports-and-proxies/default.aspx">from US$62 billion to US$189 billion</a> during 2020 and 2021, but demand for loans from tech companies grew at a slower pace. In order to achieve a return on these funds, SVB invested in long-term bonds, mainly <a href="https://www.forbes.com/sites/shivaramrajgopal/2023/03/15/svb-is-one-more-example-of-a-governance-crisis-that-seems-to-be-only-foretold-by-short-sellers-despite-plenty-of-red-flags-hiding-in-plain-sight/?sh=7edcf3b01f63#:%7E:text=In%20SVB%E2%80%99s%20case%2C%20%2463%20billion%20of%20these%20were%20%E2%80%9Cagency%20MBS%E2%80%9D%20where%20agency%20refers%20to%20one%20of%20Freddie%20Mac%2C%20Fannie%20Mae%20or%20Ginnie%20Mae%20and%20MBS%20refers%20to%20mortgage%2Dbacked%20securities.">“agency” mortgage-backed securities (MBS)</a>, which are effectively government-guaranteed.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">Silicon Valley Bank: how interest rates helped trigger its collapse and what central bankers should do next</a>
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<p>At the end of 2022, 47% of SVB’s US$212 billion asset portfolio comprised this kind of long-term debt. But the value of all fixed interest debt such as MBS falls as interest rates rise. As the US Federal Reserve raised its official interest rate during 2022 to combat inflation, long-term rates also rose and the market value of SVB’s holdings fell by US$15 billion.</p>
<p>But this drop was not recorded as a loss by SVB because it had classified nearly all of this MBS debt as “held to maturity” (HTM). Under standard <a href="https://www.investopedia.com/terms/h/held-to-maturity-security.asp">accounting rules</a>, this means they are valued according to their purchase price not the price SVB would have received for selling at that time (the market value). If these assets had been placed in the alternative accounting category – “available for sale” (AFS) – they would have been recorded at their market value and the resulting US$15 billion loss would have wiped out most of SVB’s capital. Instead of being well-capitalised, it would have been nearly bankrupt.</p>
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Read more:
<a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">How bonds work and why everyone is talking about them right now: a finance expert explains</a>
</strong>
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<p>Meanwhile, as the tech boom came to an end, the inflow of deposits turned into an outflow during 2022 as investment dried up and depositors needed their cash. By early 2023, SVB was running short of liquid assets to pay out to depositors that were making withdrawals. It <a href="https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf">attempted to borrow extra cash</a> for this purpose on March 9 but failed. This shone a light on the bank’s weakness and the outflow of deposits became a flood. The fact that most of SVB’s deposits were greater than US$250,000, and therefore <a href="https://www.fdic.gov/resources/deposit-insurance/faq/index.html#:%7E:text=Q%3A%20What%20is%20deposit%20insurance%3F">not insured by the US government</a>, no doubt made this flood worse.</p>
<p>SVB could have raised cash by selling some of its HTM assets at a loss but that would only have confirmed its poor condition. Instead, the <a href="https://www.cbsnews.com/news/silicon-valley-bank-deposits-guaranteed-signature-bank-federal-reserve-fdic/#:%7E:text=All%20deposit%20accounts%20at%20both,Deposit%20Insurance%20Corporation%20(FDIC)">Federal Reserve stepped in with a guarantee</a> for all of SVB’s accounts. </p>
<h2>Why not change the regulations?</h2>
<p>SVB <a href="https://www.theguardian.com/business/2023/mar/19/silicon-valley-banks-collapse-will-not-be-a-one-off-a-banking-crisis-was-long-overdue">is not alone</a> in this situation. Although other banks are generally not as exposed as SVB, holders of long-term US dollar debt were collectively sitting on some <a href="https://www.ft.com/content/03bd1f20-0577-43bd-a68a-24cd51367f9d">US$600 billion of unrealised losses</a> at the end of 2022.</p>
<p>Why have US banks not been required to carry enough capital to take account of interest rate risk? For a start, <a href="https://www.bis.org/basel_framework/chapter/SRP/31.htm">it would be hard to design</a> suitable rigid rules or to amend the accounting conventions. Another likely reason is that this would raise costs for all issuers of long-term debt, and the largest such issuer in all countries is the government. </p>
<p>Another likely reason is complacency. Interest rate risk was never such a serious problem during the four-decade general decline in rates before the rapid rise that began in mid-2020.</p>
<p><strong>Falling long-term US interest rates</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A line graph showing falling yields on 10-year US treasury bonds, 1985-2020" src="https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=378&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=378&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=378&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=475&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=475&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517195/original/file-20230323-26-qqcs9a.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=475&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Long-term US dollar interest rates.</span>
<span class="attribution"><a class="source" href="https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart'">Macrotrends</a></span>
</figcaption>
</figure>
<p>In the absence of a regulatory remedy for interest rate risk, the concern is that central banks will face greater pressure to reduce the chance of that risk materialising. This could cause them to soft-pedal on the interest rate rises needed to curb inflation.</p>
<p>This is dangerous. If central banks are perceived to be hesitating in their resolve to tackle inflation for fear of exacerbating financial instability, they risk their credibility. This could mean that even higher interest rates are necessary in the future to bring inflation under control.</p><img src="https://counter.theconversation.com/content/202295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Whittaker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The failure of Silicon Valley Bank has exposed gaps in financial regulation that could be tricky to fill.John Whittaker, Senior Teaching Fellow in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2021742023-03-22T10:52:16Z2023-03-22T10:52:16ZWhat is systemic risk and how does it lead to a banking crisis?<figure><img src="https://images.theconversation.com/files/516650/original/file-20230321-1318-civ0ma.jpg?ixlib=rb-1.1.0&rect=214%2C103%2C4304%2C2779&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/dead-piggy-bank-lies-upside-down-2142575907">Andrii Yalanskyi/Shutterstock</a></span></figcaption></figure><p>The recent collapse of Silicon Valley Bank (SVB), <a href="https://www.investmentweek.co.uk/news-analysis/4080434/us-regional-banks-challenging-future-aftermath-svb-blowup">a regional US bank</a> that funded start-up companies in the technology and innovation sector, has created a worldwide wave of financial instability.</p>
<p>Despite the efforts of US financial regulators to contain the potential damage by immediately providing full protection to the bank’s depositors, the collapse triggered <a href="https://news.sky.com/story/jitters-over-health-of-us-banks-spark-global-stock-market-sell-off-12830097">a global dip in banking share prices</a>. </p>
<p>The turmoil in financial markets led to <a href="https://www.ft.com/content/8be852c0-f735-4634-89bc-45238d753659">the collapse of Swiss banking giant Credit Suisse</a>, which was promptly taken over by UBS, an even larger bank. This was after an initial US$54 billion (£45 billion) lifeline from the Swiss central bank proved to be insufficient to rescue Credit Suisse.</p>
<p>How is it possible that the collapse of a relatively small financial institution like SVB could be so contagious as to end up having global consequences, including bringing down <a href="https://www.reuters.com/business/finance/how-credit-suisse-has-evolved-over-167-years-2023-03-16/">a 167-year-old financial institution like Credit Suisse</a>? </p>
<p>Answering this question requires an understanding of systemic risk, which refers to risks associated with the entire financial system. Broadly speaking, there are two distinct sources of systemic risk: balance sheet contagion and information runs.</p>
<h2>Balance sheet contagion</h2>
<p>The risk of balance sheet contagion arises from the vast number of financial agreements between companies in the international financial system. No bank operates in isolation – they are all tightly interconnected through agreements that might include both short-term and long-term loans, and various other contract types such as <a href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a>. </p>
<p>The largest financial institutions are also typically the most interconnected, providing and receiving credit from many others. When one or more of these large institutions suffer losses that cannot be covered by their capital, they become insolvent. This means they are unable to fully meet their obligations, for example if they owe money to another bank. These other banks will then also suffer losses which can spread even further, affecting their creditors and creating a potential cascade of failures. </p>
<p>The <a href="https://www.imf.org/en/Blogs/Articles/2018/09/05/blog-ten-years-after-lehman-lessons-learned-and-challenges-ahead">huge intervention in financial markets by US and European financial authorities</a> following the collapse of Lehman Brothers in 2008 aimed to avoid such contagion. In fact, the 2008 global financial crisis is a good example of the systemic risk that these large organisations with so many interconnections pose. They become “too big to fail” because their collapse will affect not only the financial system, but the whole global economy.</p>
<figure class="align-center ">
<img alt="Banking symbols on tiles, one bank is red, network is blocked." src="https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516651/original/file-20230321-16-3xdwzv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Risk can be contagious because the banking industry is so interconnected.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sanctioned-blocking-bank-exclusion-swift-economic-2266142725">Andrii Yalanskyi/Shutterstock</a></span>
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<h2>Information runs</h2>
<p>On the other hand, the recent banking crisis is an example of a systemic risk event caused by an information run. This is triggered when problems in one part of the system raise concerns about the financial robustness of other parts. </p>
<p>For example, <a href="https://ir.svb.com/news-and-research/news/news-details/2023/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock/default.aspx#:%7E:text=SVB%20sold%20approximately%20%2421%20billion,the%20first%20quarter%20of%202023.">an announcement about SVB’s asset losses on March 8 2023</a> caused its customers with unprotected deposits to rush to the bank to withdraw their money. The eventual closure of SVB raised concerns that other banks might be suffering from similar losses. This encouraged investors around the world to sell banking shares, causing a rout in the industry’s stock. </p>
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Read more:
<a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">Silicon Valley Bank: how interest rates helped trigger its collapse and what central bankers should do next</a>
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<p>Information runs happen when investors and depositors don’t have the full picture about the banks whose shares they hold or in which they have deposited their money. This causes them to draw inferences about the financial health of these banks by observing what happens in the rest of the system. People make the reasonable assumption that banks around the globe are making similar investment decisions to the one that has just collapsed. </p>
<p>Understanding systemic risk and its implications for global markets has been an important research topic for financial economists for a long time. Last year, Douglas Diamond and Philip Dybvig were <a href="https://www.nobelprize.org/uploads/2022/10/popular-economicsciencesprize2022.pdf">awarded the Nobel Prize in Economics</a> for their research in this area. In 1983, they introduced a theoretical model that explains the mechanism by which rumours about banks can lead to their eventual collapse. </p>
<p>Unfortunately, 40 years later, the international banking system has just provided another striking example of the very instability that Diamond and Dybvig outlined in their work.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nobel-economics-prize-insights-into-financial-contagion-changed-how-central-banks-react-during-a-crisis-192208">Nobel economics prize: insights into financial contagion changed how central banks react during a crisis</a>
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<h2>Unintended consequences</h2>
<p>The complex interplay between the global economy and the international financial system implies that policies aiming to solve one problem can have unintended consequences – with potentially large systemic effects. </p>
<p>Recent inflationary pressure due to rising energy prices and the war in Ukraine has led central banks to raise interest rates to curb global demand and try to reduce inflation. However, rising interest rates caused a drop in the prices of fixed-income securities such as government bonds. These bonds are held by financial institutions like SVB that then see the value of a significant portion of their assets drop. This limits their ability to raise funds and satisfy the demands for liquidity from other banks, businesses and households.</p>
<p>Such issues can quickly spread throughout the financial system and, if they infect a large bank, the impact can multiply very quickly – as we have seen during the 2008 financial crisis and more recently.</p>
<p>The danger to the entire financial system from a few giant banks failing is well recognised. The irony is that, during both the global financial crisis and the recent financial turmoil, <a href="https://news.sky.com/story/high-street-banks-given-24-hours-to-rescue-silicon-valley-bank-uk-12831984">part of the solution</a> has been for failed institutions to be absorbed by even bigger banks. Such consolidation enhances systemic risk by potentially sowing the seeds of future crises.</p><img src="https://counter.theconversation.com/content/202174/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Spiros Bougheas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are two types of systemic risk that can infect the highly interconnected global banking system.Spiros Bougheas, Professor of Economics, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2020612023-03-21T13:11:31Z2023-03-21T13:11:31ZHow changing banks’ corporate social responsibility reporting could prevent future financial failures<figure><img src="https://images.theconversation.com/files/516397/original/file-20230320-1833-y3s5xw.jpg?ixlib=rb-1.1.0&rect=114%2C102%2C8266%2C5353&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A company's internal structure can provide protection from external events.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-human-hand-stopping-wooden-blocks-758183026">Andrey_Popov/Shutterstock</a></span></figcaption></figure><p>The recent collapse of Silicon Valley Bank (SVB) – the failure of the biggest US lender since the 2008 global financial crisis – has created waves across the global banking system. The subsequent collapse of another US institution, Signature Bank, the US$30 billion (£24.5 billion) lifeline given to First Republic Bank and the latest turmoil affecting Credit Suisse has <a href="https://www.forexlive.com/news/european-equities-down-at-the-open-with-bank-stocks-lower-20230320/">dragged down European bank stocks</a>.</p>
<p>While the Swiss bank was rescued by its competitor and markets are starting to recover, it too early to say whether when or how recent nerves about the global banking sector might end. But no matter when the US bank failures and European bank panic end up, some lessons must be learned in the UK. In particular, increasing corporate governance and corporate social responsibility (CSR) requirements could help ease future banking failures.</p>
<p>The first version of <a href="https://www.frc.org.uk/directors/corporate-governance/uk-corporate-governance-code#current-edition">the UK Corporate Governance Code</a> (the code) was published in 1992 by the Cadbury Committee. It defined corporate governance as “the system by which companies are directed and controlled,” with boards of directors holding responsibility for this.</p>
<p>A large body of <a href="https://www.sciencedirect.com/science/article/pii/S0929119908000242?casa_token=OjHnWQ4bNfIAAAAA:kHsFoHBDsetEvd0IQcoLGrR7ORZl1fYHBc4TRIqW43Q_uENWznGMRPV1soac-BHn23LDx56yl_A">academic studies</a> have shown a <a href="https://www.sciencedirect.com/science/article/pii/S0929119919300628?casa_token=-etn5svCyZwAAAAA:BhhSFVM5_93UoGIgDbg_J2WT9WhbBR9UVCUkagP9dIJ5dJyYSFZgebRjfah6P9N4hXlfdzvLQDs">positive relationship</a> between <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1540-6261.00457">corporate governance and company performance</a>. Even then, many companies still do not pay enough attention to this issue. </p>
<p>SVB is a good example. Only <a href="https://www.dailymail.co.uk/news/article-11859379/Only-ONE-member-failed-SVBs-board-experience-investment-banking.html">one member of its board</a> had previously made a career in investment banking, according to reports, with other members coming from sectors such as <a href="https://www.forbes.com/sites/noahbarsky/2023/03/12/silicon-valley-bank-proxy-shows-boards-secret-yearlong-risk-panic/?sh=71a521ed1e7b">healthcare and consultancy</a>. </p>
<p>This goes against principles issued by the <a href="https://www.bis.org/press/p150708.htm">Basel Committee on Banking Supervision</a> – a global banking standard setter – that board members should have a range of knowledge and experience in relevant areas. This includes financial analysis and reporting, financial stability, information technology, risk management, regulation and corporate governance. </p>
<p>Similarly, the reason the collapse of SVB hit Swiss bank Credit Suisse much harder than others was almost certainly due to recent material weaknesses that had been revealed in its internal controls and risk management procedures. These important governance measures help banks prevent and manage issues that might affect company stability.</p>
<p>Credit Suisse has already endured many <a href="https://www.bbc.co.uk/news/business-64973321">scandals in recent years</a>, including high profile departures, money laundering charges and spying allegations. All of this indicates a failure in its corporate governance. So, recently rescued banks such as Credit Suisse and First Republic, as well as other banks that remain safe so far, need to reassess and strengthen this area of their businesses. This includes looking at internal controls, risk management and protections for investors.</p>
<h2>What is corporate social responsibility?</h2>
<p><a href="https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr">CSR</a> and corporate governance are <a href="https://www.managementstudyguide.com/csr-and-corporate-governance.htm">two sides of the same coin</a>. They encourage companies to integrate social and environmental concerns in their business operations and interactions with their stakeholders such as customers, employees, suppliers and shareholders. </p>
<p>CSR can also help banks maintain financial stability, especially in times of crisis. <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8551.12631">Research</a> shows that during the COVID-19 pandemic, banks with higher levels of environmental and social activities were more financially stable. Similarly, right now banks also need to prioritise financial stability. They could do this, for example, by lowering their exposure to credit and liquidity risk to protect their customers, investors and employees – and by extension, the wider economy.</p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S1042443123000082">Other research</a> also shows that investors become more tolerant and more lenient towards banks with stronger CSR after an economic recession. This can reduce the likelihood of extreme devaluations of banking stocks – such as that experienced by Credit Suisse before its rescue by UBS. This also helps banks manage unexpected and long-term risks after times of crisis.</p>
<figure class="align-center ">
<img alt="Ornate building with credit suisse sign, blue sky with clouds; Zurich, Switzerland - April 19, 2021. Credit Suisse in the Swiss financial centre of Zurich city." src="https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516399/original/file-20230320-592-9crbyi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Credit Suisse’s office in the Swiss financial centre of Zurich. It was the second-largest Swiss bank and a globally important financial sector player until its takeover by UBS in March 2023.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/zurich-switzerland-april-19-2021-credit-2124593126">YueStock/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Lessons for government and financial regulators</h2>
<p>Following the SVB and Signature Bank collapses, the US government stepped in and took decisive action to protect depositors and the banking system. The UK government and the Bank of England also swiftly facilitated the sale of SVB UK to HSBC. Then the European Central Bank (ECB) provided emergency support to Credit Suisse and helped broker <a href="https://edition.cnn.com/2023/03/19/business/credit-suisse-ubs-rescue/index.html">a deal for the bank’s rival to buy it</a> for £2.6 billion. All of these quick actions will have helped to shore up confidence in the banking sector to some extent – <a href="https://www.reuters.com/business/finance/credit-suisse-takeover-central-bank-action-calm-jittery-markets-2023-03-20/">even if the immediate reaction was negative</a>. </p>
<p>But regulators have a responsibility to protect markets from a crisis, not just rescue their participants. Last December, the UK government announced plans to overhaul financial sector regulation under <a href="https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms">the Edinburgh Reforms</a>. This is an attempt to spur growth following Brexit and the COVID-19 lock downs. But the most recent turmoil in the global banking sector should cause all governments to rethink any reforms or changes to financial sector rules very carefully.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-reforms-could-make-the-uk-a-sustainable-finance-hub-but-also-threaten-financial-stability-196566">Banking reforms could make the UK a sustainable finance hub, but also threaten financial stability</a>
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<p>In particular, given the importance of corporate governance, especially in times of crises, regulators need to update corporate governance codes and policies. The UK’s current Corporate Governance Code requires a board and its committees to have a combination of relevant skills, experience and knowledge. Although the code calls for at least one member with recent and relevant financial experience, that threshold should perhaps be lifted for banks – especially since their fortunes are so closely tied to the businesses and households that they lend to. </p>
<p><a href="https://www.emerald.com/insight/content/doi/10.1108/MEDAR-01-2018-0259/full/html">Research</a> shows that the regulatory environment, as well as an industry’s level of self-regulation and an organisation’s commitment to maintaining an open dialogue with relevant stakeholders, were crucial factors in whether banks reported on CSR. Those that did so largely survived the 2008 global financial crisis.</p>
<p>Regulators need to work with professional bodies, bank investors and the banks themselves to strengthen CSR reporting and ensure it fulfils its potential in maintaining banks’ financial stability during the current crisis.</p><img src="https://counter.theconversation.com/content/202061/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erwei (David) Xiang received funding from Accounting and Finance Association of Australia and New Zealand (AFAANZ) on a relevant research project.
He is a member of European Accounting Association (EAA), British Accounting and Finance Association (BAFA), and AFAANZ.</span></em></p>Companies benefit from certain internal environmental and social checks and balances, particularly when it comes to preventing a tumble in their share price.Erwei (David) Xiang, Senior Lecturer (Associate Professor) in Accounting, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2020042023-03-20T16:23:07Z2023-03-20T16:23:07ZFour ways to protect your small business from a banking crisis<figure><img src="https://images.theconversation.com/files/516010/original/file-20230317-3164-h1n8e9.jpg?ixlib=rb-1.1.0&rect=23%2C20%2C949%2C609&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portrait-confident-black-businesswoman-all-african-1256023498">Jono Erasmus/Shutterstock</a></span></figcaption></figure><p>The banking sector is currently experiencing great strain, which has resulted in several bank bailouts – most recently UBS’ deal to buy its Swiss competitor Credit Suisse following a collapse in confidence in the latter. <a href="https://www.hsbc.com/news-and-media/media-releases/2023/hsbc-acquires-silicon-valley-bank-uk-limited">HSBC’s acquisition</a> of the UK arm of the collapsed Silicon Valley Bank the previous week brought great relief for its depositors, many of which were small tech start-ups. </p>
<p>SVB’s UK clients were lucky that the government facilitated the rescue deal so quickly – it was announced the Monday after SVB collapsed in the US – but they still endured several days of worry and uncertainty beforehand. And with financial markets now responding to continued concerns about the banking sector, particularly in Europe, it doesn’t look like all banks – or their clients – are out of the woods yet. </p>
<p>At a time like this, many small businesses will be thinking about their finances and how to make them more secure so they don’t face the same fate if there are similar situations in the future. </p>
<p>Here are four ways to shore up your small business banking in preparation for uncertain times:</p>
<h2>1. Split up your accounts</h2>
<p>As a small business, you may not have the means to diversify the range of products or services you offer right now, but you can diversify your banking portfolio. This means, rather than tying up your business needs with one bank, keeping some money and loans with a couple of different institutions.</p>
<p>Speaking of which, when opening an account with a new bank, get the full picture of its strengths and weaknesses. This means checking for any significant recent changes in its assets or its sources of finance, which will tell you if its business is concentrated in any one industry. </p>
<p>Similarly, don’t just open an account with the bank that your industry peers use. SVB’s collapse has been partly blamed on its concentration in the tech sector. Although this means a bank can develop specialist expertise and understanding, it can also leave it exposed if it’s main sector experiences a downturn. </p>
<h2>2. Be careful when banking beyond borders</h2>
<p>The ease of online communications and payments these days means even small businesses can expand overseas. But when operating in a different country you should consider the <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/effects-of-cultural-values-on-bank-failures-around-the-world/F057EB21CA974993FA1953EDFFDEE3F7">cultural values</a> of a country because research shows this can affect a bank’s attitude to taking risk. </p>
<p>For example, in some countries, banks are allowed to operate with less easy to access money on hand in case of a problem, but governments are more reluctant to bail out failures, meaning your money will disappear if your bank fails. Before you choose a bank beyond your borders, collect information about its operational behaviour to gauge how much risk it likes to take. You can find this in published financial statements, media articles and by speaking to others in the industry.</p>
<figure class="align-center ">
<img alt="Small Business / Small business concept on bulletin board in office" src="https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516013/original/file-20230317-16-3lpzbn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Small business plan.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-business-concept-on-bulletin-board-289889759">Aysezgicmeli/Shutterstock</a></span>
</figcaption>
</figure>
<h2>3. Consider a range of borrowing options</h2>
<p>You might have an excellent business idea but without hard assets, it can be difficult to get a bank loan. There are plenty of other options such as R&D grants from local or national governments. </p>
<p>You could also look for investors, which is called raising equity. It essentially brings more money into your business. This can help lower your leverage ratio, which means you have to give over less of your profits to a lender and can reinvest money in your business instead.</p>
<p>In other words, consider exploring ways to hold less debt, even when you are a growing business. There is no standard debt to equity ratio, it depends on the business. Some people think that less debt indicates that the business is not growing, others believe <a href="https://link.springer.com/article/10.1007/s11187-019-00294-y">less debt makes the business stronger</a> because it has more cash on hand for daily operations, rather than relying on credit.</p>
<p>Many small firms, particularly in the tech sector, look to venture capital firms for funding. A shorter-term source of money, they usually buy a stake in a start-up idea and then exit as the company grows and becomes more valuable. </p>
<p>Venture capitalists charge management fees, which are higher for businesses seen as a risky bet. You also typically pay them a share of the profits. And as with any business deal, check credentials such as funding, other business relationships and investments before signing.</p>
<h2>4. Set up an emergency fund</h2>
<p>Try to maintain one third of your typical monthly expenses as an emergency fund – but even if you can’t manage that, set something aside. And don’t forget to top up the emergency fund if do have to dip in. </p>
<p>Also, think about where to keep your emergency fund. Popular places include high yield savings or money market accounts because they are easily accessible, especially when you need cash in hand. But remember to check the policy for how quickly you can convert any holdings to cash. And keep the relevant paperwork updated and in a safe place that you can access quickly. </p>
<figure class="align-center ">
<img alt="Woman with bills, calculator, working out finances" src="https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516012/original/file-20230317-2480-vvx7pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Small business finance.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/caucasian-woman-invoice-bills-1038709384">Rawpixel.com/Shutterstock</a></span>
</figcaption>
</figure>
<p>Although you have the ultimate responsibility for your own small business finances, the regulator still plays an important role in supporting and protecting the financial system and those within it. The UK Treasury recently published a report on its <a href="https://www.fca.org.uk/publications/corporate-documents/future-regulatory-framework-review">Future Regulatory Framework Review</a>. This aims to identify any changes the government and regulators believe are needed post-Brexit to ensure the UK remains competitive.</p>
<p>Such rules should protect the sector from problems, such as the current banking sector issues in the US and now Europe, while also ensuring start-ups and small and medium sized businesses still have access to a strong financial services market.</p>
<p>The HSBC deal to rescue SVB’s UK arm was a reassuring short-term arrangement from the UK government, but the long-term objective should be be to ensure the UK’s regulatory framework protects otherwise healthy firms – of all sizes – from failing during a crisis.</p><img src="https://counter.theconversation.com/content/202004/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Small companies should think hard about their finances and how to make them more secure, particular in uncertain times.Monomita Nandy, Reader in Accounting and Finance; Director of Internationalisation, Brunel University LondonSuman Lodh, Associate Professor in Finance, Kingston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2018242023-03-15T16:56:43Z2023-03-15T16:56:43ZSilicon Valley Bank: 19th-century financial crises show how today’s regulators could help repair the economy<p>A bank failure wipes out the money available to its customers and freezes any capital that’s already in circulation. Depositors, borrowers and owners or shareholders all suffer as a result, as does <a href="https://www.reuters.com/business/finance/some-us-banks-facing-stock-rout-may-need-seek-partners-2023-03-14/">wider economic activity</a> and often the communities or business sectors that the banks serves. </p>
<p>These issues can become all the more concentrated in the wake of a regional or specialist banking collapse due to the specific reach of the failed institution. Silicon Valley Bank (SVB) is the second largest bank failure in US history but its focus was specific, it specialised in providing funding to start-ups, venture capitalists and technology firms. </p>
<p>This banking collapse reminds us of a spate of private bank failures that created a financial crisis at the start of 19th century in England and Wales. Although these banks all differed from SVB in terms of scale and volume of finance provided, these early 19th-century institutions served specific communities.</p>
<p>They also had a tendency to fail. And when they did, the impact on the regional economy was considerable. Lines of credit for local businesses dried up and some struggled to survive. </p>
<p>Banking families were also adversely affected. The failure of private banks owned by Henry Austen, brother of author Jane Austen, for example, had <a href="https://archive.org/details/austencollreport_1996_2000_202004/page/139/mode/2up?view=theater">a detrimental impact on the financial health</a> of the wider Austen family. Henry ended up owing £58,000 to his creditors, which would be about £6.5 million in today’s money.</p>
<p>Regulations put in place after these failures aimed to make these organisations more stable by diversifying the way they made money. This could provide some important lessons for regulators assessing the damage of the latest banking crisis.</p>
<p>New laws were passed in 1826, following the 1825-1826 financial crisis in which the country was claimed to have been “<a href="https://books.google.co.uk/books/about/History_of_the_London_Discount_Market.html?id=gd9YAQAAQBAJ&redir_esc=y">within twenty-four hours of barter</a>”. In other words, the financial system was close to collapse – without access to money, people would have to resort to merely exchanging goods.</p>
<p>This crisis saw the failure of 93 private banks across England and Wales – <a href="https://centaur.reading.ac.uk/66948/1/Virtuous%20banking.pdf">around 15% of the total market</a>.</p>
<p>Our research in this area shows that the causes of the crisis were complex. But the result was a widespread loss of confidence in private banks. These were small-scale, personally owned banks, with a maximum of six partners or owners. This meant these banks drew from a limited pool of capital to lend to their customers and only held a small amount of reserves. </p>
<p>Like Austen, <a href="https://www.natwestgroup.com/heritage/companies/stuckeys-banking-co-ltd.html">the people that ran private banks</a> were usually privately wealthy, rather than engaged in local manufacturing. There was also no central bank and no national regulator of financial services to keep these organisations on the strait and narrow.</p>
<h2>Radical banking regulations</h2>
<p>This crisis and the resulting push for reform of the banking system led to legislation that was radical for its time: <a href="https://www.jstor.org/stable/23703071?searchText=&searchUri=&ab_segments=&searchKey=&refreqid=fastly-default%3A567b3b8524cf9f2bc115fcf2bcb3c65d">the 1826 Bank Act</a>. These new laws created the first wave of “joint-stock” retail banks in England and Wales, with 138 formed between 1826 and 1844. These organisations were allowed to issue shares, which gave them wider access to capital from more diverse sources. </p>
<p>The new banks were also run by professional managers and their directors were usually members of the local business community. These meant they had a vested interest in <a href="https://centaur.reading.ac.uk/70079/">providing successful banking services</a> to the local economy.</p>
<p>Two prospectuses <a href="https://centaur.reading.ac.uk/102671/1/Financing%20regions_20_Sept_21_VB.pdf">we found in the HSBC Group archives</a> show how these banks recognised the impact of the recent financial turmoil on these regions. The 1829 prospectus of the York City and County Bank declared: </p>
<blockquote>
<p>It is impossible to describe the accumulated misery of those failures entailed upon thousands of families and individuals.</p>
</blockquote>
<p>The 1827 prospectus for the Huddersfield Banking Company said:</p>
<blockquote>
<p>this district has not only suffered the evils resulting from the general suspension of demand, which has been common to all manufacturing districts, but has been visited with an additional local evil in the failure of five banking establishments.</p>
</blockquote>
<p>The 1826 Act showed government recognised that a more stable banking system was desirable for the public good. And since shares in joint-stock banks could also be purchased by members of the public, these were public institutions. In fact, our research shows shares were <a href="https://centaur.reading.ac.uk/16419/">mainly held by local investors</a>. </p>
<p>This so-called “patient capital” (or long-term investment) was provided by committed local individuals. This was a stark difference to the previous private banks, which were operated by a few individuals. Unsurprisingly then, the reforms were opposed by both private bankers and the Bank of England, but were nevertheless passed by parliament.</p>
<h2>Helping the local economy</h2>
<p>The new banks were motivated to achieve local and regional benefits through provision of successful, stable and profitable banking services. Most survived until the end of the 19th century, when they were absorbed and became branches of the “Big Five” banks that emerged at the start of the 20th century: Lloyds, Barclays, National Provincial, Westminster Bank and Midland Bank. Some of these branches <a href="https://centaur.reading.ac.uk/66819/11/Banks%20and%20Branches_full_final.pdf">remain on UK high streets to this day</a>.</p>
<p>The private banks of the early 19th century were very different to SVB. They were smaller in scale, operated in a less global, less technologically advanced and less regulated economic system. But the disastrous regional impact of their failure is comparable, certainly in terms of the impact on individuals and businesses. </p>
<p>The shock of a bank failure is both immediate and long lasting, as we know from the 2008 global financial crisis. This kind of situation led to quite radical solutions in 1826 – essentially a restructuring of UK banking services – and again after the 2008 crisis. </p>
<p>Economist <a href="https://www.theguardian.com/business/2023/mar/13/silicon-valley-bank-failure-svb-collapse">Joseph Stiglitz is among those calling</a> again for new legislation or regulations in the wake of SVB’s collapse. Just as in England and Wales in 1826, the personal cost of bank failure is severe and governments should take steps to avoid such consequences.</p><img src="https://counter.theconversation.com/content/201824/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Victoria Barnes has received funding from Economic and Social Research Council for a project on the regulation of banks in the nineteenth century. </span></em></p><p class="fine-print"><em><span>Lucy Newton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New rules following a spate of bank failures in 19th century Britain could provide some lessons for today’s regulators.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingVictoria Barnes, Reader in Commercial Law, Brunel University LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2016972023-03-13T15:58:46Z2023-03-13T15:58:46ZSilicon Valley Bank: how interest rates helped trigger its collapse and what central bankers should do next<p>A former prime minister of Britain, Harold Wilson, is famous for remarking that <a href="https://en.wiktionary.org/wiki/a_week_is_a_long_time_in_politics">a week is a long time in politics</a>. But in the world of finance, it seems everything can change in just two days. </p>
<p>Only 48 hours elapsed between <a href="https://ir.svb.com/news-and-research/news/news-details/2023/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock/default.aspx">a statement from US-based Silicon Valley Bank (SVB)</a> on March 8 that it was seeking to raise US$2.5 billion (£2 billion) to repair a hole in its balance sheet, and the announcement by US regulator the Federal Deposit Insurance Corporation that <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">the bank had collapsed</a>. </p>
<p>At its peak in 2021, <a href="https://www.ft.com/content/f55df9d1-386a-4643-8194-095228741054">SVB was worth US$44 billion</a> and managed over $200 billion in assets. America’s 16th largest deposit-taking institution just a week ago, it has now become the second biggest banking failure in US history. Only <a href="https://www.reuters.com/article/us-washingtonmutual-jpmorgannews1-idUSTRE48P05I20080926">the collapse of Washington Mutual</a> during the 2008 global financial crisis was larger.</p>
<p>Although SVB had been ailing for some time, the speed of its collapse took nearly all commentators – as well as its customers, mostly from the tech sector – by surprise. Tech firms around the world have their cash locked up in SVB deposits and were concerned about how they would pay their workers and their bills until <a href="https://www.cbsnews.com/sanfrancisco/news/us-government-moves-guarantee-silicon-valley-bank-depositors-funds/">government support was announced in the US</a>, alongside <a href="https://www.bbc.co.uk/news/business-64937251">HSBC’s deal to buy SVB’s UK arm</a>. </p>
<p>And it looks like the run on SVB that heralded its collapse – by some metrics the fastest in history – is spreading to other institutions with similar characteristics. On March 12, two days after SVB’s collapse, regulators in New York closed Signature Bank, <a href="https://www.fdic.gov/news/press-releases/2023/pr23018.html">citing systemic risk</a>.</p>
<p>But was what happened to SVB unpredictable, unpreventable and unavoidable? My research suggests not. My latest <a href="https://link.springer.com/book/10.1007/978-3-031-11914-9">book about the history of financial crises</a>, Calming the Storms: the Carry Trade, the Banking School and British Financial Crises Since 1825, was coincidentally launched the day before SVB failed and describes three situations in which a banking crisis may unfold.</p>
<h2>Why SVB collapsed</h2>
<p>One potential cause is when changes in interest rates between countries cause movements in capital flows to suddenly start or stop as investors chase better rates. This affects the availability of finance. This is what happened during the 2007 credit crunch that preceded the global financial crisis, but it wasn’t behind SVB’s collapse.</p>
<p>SVB’s failure does tie in with the other two situations I describe in my book. </p>
<p>The first is when interest rates rise rapidly. The cause may be a central bank reacting to <a href="https://www.bbc.co.uk/news/business-64639662">a surge of inflation</a>, a <a href="https://theconversation.com/how-the-war-in-ukraine-will-affect-food-prices-178693">war</a> or a <a href="https://www.aljazeera.com/economy/2023/1/4/us-labour-market-remains-tight-manufacturing-slows-down">tight labour market</a>. Indeed, the Federal Reserve, alongside other central banks, has <a href="https://www.cnbc.com/2023/03/07/fed-chair-powell-says-interest-rates-are-likely-to-be-higher-than-previously-anticipated.html">raised rates</a> from a band of 0.25%-0.5% to 4.5%-4.75% over the past 12 months. </p>
<p>Higher rates tighten credit conditions. This makes it harder for financial institutions to finance themselves, while also damaging the value of their existing loans and assets. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-unemployment-the-housing-crisis-and-a-possible-recession-two-economists-forecast-whats-ahead-in-2023-195797">Inflation, unemployment, the housing crisis and a possible recession: Two economists forecast what's ahead in 2023</a>
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</em>
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<hr>
<p>The second is when short-term interest rates rise above long-term rates, as has happened in America over the past few months. During the pandemic, tech startups with spare cash from funding rounds in a world of easy money placed their deposits with SVB. With little demand for loans from this sector, SVB invested most of the money in long-term bonds – mostly mortgage-backed securities and US Treasuries. </p>
<p>In short, SVB was taking funds mainly on short-term deposit and tying them up in long-term investments. Then, over the past few months, short-term rates rose higher than the returns on longer-dated bonds (see chart below). This is because interest rates were soaring, thanks to the Fed’s rate hikes. </p>
<p><strong>US interest rate changes</strong></p>
<figure class="align-center ">
<img alt="Line graph showing long- and short-term US interest rates rising over time, with short overtaking long in 2022." src="https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=373&fit=crop&dpr=1 754w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=373&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/514888/original/file-20230313-24-4ci4jq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=373&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.oecd-ilibrary.org/finance-and-investment/interest-rates/indicator-group/english_86b91cb3-en">Author provided from OECD data</a></span>
</figcaption>
</figure>
<p>With funding rounds harder to come by in a high-interest rate environment, tech firms began to withdraw and spend their deposits. At the same time, these higher rates resulted in falling prices for the bonds in which SVB had been investing. That squeezed SVB’s profit margins and put its balance sheet on shaky ground. </p>
<p>This situation was made worse because SVB needed to sell some of its longer-dated bonds at a loss to fund the deposits its customers were withdrawing from the bank. The news of the sales made depositors withdraw more funds, which had to be funded through more sales. A doom loop ensued. </p>
<p>The March 8 announcement that SVB was looking to raise US$2.5 billion to plug the hole in its balance sheet left by these asset fire sales triggered the bank run that finished it off.</p>
<h2>Concerns about systemic risk</h2>
<p>How worried should we be about the collapse of SVB? It is not a major player in the world’s financial system. It is also almost unique in modern banking in terms of its <a href="https://www.theguardian.com/business/2023/mar/12/why-silicon-valley-bank-was-so-important-to-uk-tech-sector">dependence on one sector</a> for its client base and the vulnerability of its balance sheet to interest rate rises.</p>
<p>But even if SVB’s collapse does not trigger a wider financial crisis, it should serve as an important warning. Rapidly rising interest rates over the past year <a href="https://theconversation.com/autumn-statement-2022-this-budget-may-not-cause-truss-level-chaos-but-it-could-still-provoke-markets-192903">have made the global economy fragile</a>. </p>
<p>The world’s central bankers are treading a narrowing path of trying to combat inflation without harming financial stability. Central bankers must manage interest rates more carefully, while regulators should discourage the finance sector from borrowing short to lend long without sufficient hedging of the risks this entails. </p>
<p>It is also important that central banks monitor the impact that interest rate differences and cross-border capital flows have on the credit that’s available to both banks and businesses. Even if the failures of SVB and Signature prove to be no more than “little local difficulties” (<a href="https://www.oxfordreference.com/display/10.1093/acref/9780191843730.001.0001/q-oro-ed5-00006970;jsessionid=A529BB39C9A6DDF89D7664AB3AAB4EB0#:%7E:text=little%20local%20difficulties">to quote another past UK prime minister, Harold Macmillan</a>), the systemic risks that their collapse have highlighted can no longer be ignored.</p><img src="https://counter.theconversation.com/content/201697/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Charles Read's research is funded by a British Academy postdoctoral fellowship grant.</span></em></p>The speed of SVB’s collapse was a surprise but central bankers can learn lessons from this failure.Charles Read, Fellow in Economics and History at Corpus Christi College, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1965662022-12-21T15:58:34Z2022-12-21T15:58:34ZBanking reforms could make the UK a sustainable finance hub, but also threaten financial stability<figure><img src="https://images.theconversation.com/files/502380/original/file-20221221-12-6ss9zi.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5470%2C3635&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Relaxing some banking rules could affect the stability of the UK's financial sector, largely based in the City of London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-nov-1-2012-tower-2162519901">Dmitry Naumov / Shutterstock</a></span></figcaption></figure><p>The UK government wants to rewrite the rules designed to keep the country’s banks and financial institutions stable – again. The so-called <a href="https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms">Edinburgh reforms</a> announced recently by UK chancellor Jeremy Hunt will “unlock investment and turbocharge growth in towns and cities across the UK”, he says. </p>
<p>The government is certainly heading in the right direction in some areas, including new measures on sustainable finance. Hunt has promised <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1074650/green-finance-strategy-cfe.pdf">a 2023 update</a> to its <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/820284/190716_BEIS_Green_Finance_Strategy_Accessible_Final.pdf">original green finance strategy</a>, published in 2019. This includes regulating the environmental social and governance (ESG) ratings providers from which financial firms get data for green investment and lending decisions.</p>
<p>It will be a challenge to standardise this sector since there were <a href="https://www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/sustainability-ratetheraters2020-report.pdf">more than 600 ESG ratings and rankings in 2018</a> and the industry has only continued to grow since. But government plans to work with regulators to <a href="https://www.fca.org.uk/news/news-stories/code-conduct-esg-data-and-ratings-providers">safeguard transparency and good market conduct</a> in this area could help the City of London to become a global centre for sustainable finance. </p>
<p>On the other hand, some of the regulations that Hunt wants to reverse were only recently introduced in response to the 2008 global financial crisis. Relaxing them could jeopardise the UK’s financial stability. What has changed in less than 15 years to warrant a relaxation of these rules? The short answer is nothing. In fact, history seems to be repeating itself. </p>
<p>The <a href="https://www.britannica.com/event/Great-Depression">Great Depression</a> of the 1930s – the longest and deepest global economic crisis of the 20th century – was triggered by a catastrophic failure of financial markets and banks. <a href="https://www.federalreservehistory.org/essays/glass-steagall-act">Banking legislation</a> introduced afterwards aimed to separate investment banking from commercial banking to protect customer deposits and ensure financial stability. </p>
<p>This was all forgotten during the wave of banking deregulation in the 1980s and 1990s. Reversing these post-depression separation rules basically prepared the ground for the 2008 global financial crisis. After that downturn, <a href="https://www.bankofengland.co.uk/prudential-regulation/key-initiatives/ring-fencing">ring-fencing was reintroduced in both the UK</a> and <a href="https://www.federalreserve.gov/supervisionreg/volcker-rule.htm">the US (via the Volcker rule)</a>.</p>
<figure class="align-center ">
<img alt="Britain's Foreign Secretary Jeremy Hunt attends in an European Union Foreign Affairs Council meeting." src="https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK chancellor, Jeremy Hunt.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brussels-belgium-15th-july-2019-britains-1451368922">Alexandros Michailidis / Shutterstock</a></span>
</figcaption>
</figure>
<p>This is why it was surprising when UK chancellor, Jeremy Hunt, announced the <a href="https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms">Edinburgh reforms</a> in December 2022. These changes will relax three important protections that were <a href="https://www.bis.org/publ/arpdf/ar2009e1.pdf">created after the global financial crisis</a> to address some very specific contributing factors to that crash. </p>
<h2>1. The ring-fencing of bank capital</h2>
<p>When retail banks ring-fence a certain amount of capital it protects them from shocks originating elsewhere in their business, such as a risky investment or overseas activities. From a bank’s point of view, it increases the <a href="https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Bankers-Without-Borders-Implications-of-Ring-Fencing-for-European-Cross-Border-Banks-24335">level of shareholder capital it must hold rather than invest</a>, which makes the bank less profitable. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060994/CCS0821108226-006_RFPT_Web_Accessible.pdf">recent independent UK review</a> recommended tweaking ring-fencing regulation slightly to change its scope to focus on large, complex banks. However, it reinforces its fundamental role in protecting the money people deposit with banks in basic savings and current accounts.</p>
<p>Increasing the level of shareholder capital banks must hold was a <a href="https://www.bis.org/bcbs/basel3/b3_bank_sup_reforms.pdf">major post-GFC regulatory change</a> because the levels had not properly cushioned banks’ losses during the crisis. This is partly why billions of pounds of <a href="https://commonslibrary.parliament.uk/research-briefings/sn05748/#:%7E:text=From%20September%202007%20to%20December%202009%2C%20the%20then,of%20which%20has%20been%20recouped%20over%20the%20years.">taxpayers’ money was spent bailing out</a> failed banks in the UK after the 2008 crash.</p>
<h2>2. Senior management accountability</h2>
<p>Excessive risk taking by some bank executives was another factor in the fall of the banking sector in 2008. Flawed compensation schemes that encouraged short-term thinking encouraged many managers to take high stakes bets with no liability. After the crisis <a href="https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2014/cp1514">regulators introduced measures</a> to discourage such excessive risk taking. This included bonus caps – <a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">since removed by the previous chancellor</a> – and clawbacks of previous bonuses for any serious wrongdoing in the run-up to the financial crisis. </p>
<p>The current chancellor is taking this a step further with a review of a key regulation introduced to increase <a href="https://www.fca.org.uk/firms/senior-managers-certification-regime">senior bank managers’ accountability</a>. UK regulators <a href="https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/report/evaluation-of-smcr-2020.pdf?la=en&hash=151E78315E5C50E70A6B8B08AE3D5E93563D0168">recently reported that this rule</a> – the senior managers and certification regime – is curbing risk appetite quite effectively, with 94% of managers seeing a positive impact on behaviour and culture in banks as a result.</p>
<h2>3. Securitisation</h2>
<p>Restrictions on the sale of a group of loans or mortgages as a bundled financial product – or securitisation – will also be reconsidered under Hunt’s plan. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1040038/Securitisation_Regulation_Review.pdf">government review</a> last year recommended relaxing such criteria, but there is also <a href="https://www.sciencedirect.com/science/article/abs/pii/S1057521918301339">abundant evidence</a> that securitisation destabilised banks during the 2008 crisis. </p>
<p>The use of these products contributed to deteriorating lending standards at many banks because the bundled nature of these products essentially made them opaque. Once a <a href="https://www.federalreserve.gov/boarddocs/speeches/2005/20050505/">financial innovation that was heavily praised by leading policy makers,</a> securitisation was actually a major cause of the global financial crisis.</p>
<h2>Varying support</h2>
<p>Regulators have <a href="https://www.telegraph.co.uk/business/2022/12/18/bank-england-hits-back-rishi-sunaks-plan-liberate-city-london/">voiced concerns</a> about damage to financial stability due to any relaxation of rules – <a href="https://www.ft.com/content/98882508-7de9-476e-becd-5c9697870770">both current</a> and <a href="https://www.ft.com/content/33f73a5a-9c11-4f59-a7f9-ddd1e56cffbd">former Bank of England staff</a>. Senior European Central Bank figures have also <a href="https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog221104%7E34240c3770.en.html">criticised similar efforts</a> to dilute <a href="https://www.ft.com/content/c872d5b9-984e-493c-942d-2dcdc9c8e4b7">EU banking regulations</a>.</p>
<p>Perhaps unsurprisingly, some <a href="https://www.ft.com/content/6cbd63e6-3413-4d4c-9285-6e46dfd7b612">city figures</a> are largely in favour of these changes. City minister Andrew Griffith has said he is <a href="https://www.ft.com/content/7fd1b000-774a-45a2-bf89-611fde48f7ba">“assured” that banks are safe</a>, for example. </p>
<p>But no one predicted the 2008 global financial crisis either. Also, banking sector risk can accumulate over time. Relaxing the rules is unlikely to lead to an immediate crash, but risk could build up in the financial system over the next 5 to 10 years following any changes.</p>
<p>The global financial crisis has cost Britain up to <a href="https://www.economist.com/free-exchange/2010/03/31/big-numbers">£7.4 trillion in lost output</a> alone. It has also had significant negative long-term effects on <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018#Chapter%202">global economic growth and income inequality</a>, among many other issues.</p>
<p>Boosting economic growth by making the City internationally competitive may be successful in the short term. But rolling back these key regulatory measures all at once could jeopardise the UK’s long-term financial stability.</p><img src="https://counter.theconversation.com/content/196566/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New green finance measures aside, UK chancellor Jeremy Hunt’s Edinburgh reforms look like history repeating itself.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1946922022-11-17T13:29:36Z2022-11-17T13:29:36ZDramatic collapse of the cryptocurrency exchange FTX contains lessons for investors but won’t affect most people<figure><img src="https://images.theconversation.com/files/495726/original/file-20221116-12-324kxc.jpg?ixlib=rb-1.1.0&rect=81%2C72%2C4464%2C2940&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The cryptocurrency exchange FTX fell from a multibillion-dollar company to bankruptcy in less than a week.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/logo-with-crypto-coins-with-100-dollar-bill-are-displayed-news-photo/1244719587?phrase=FTX%20crypto&adppopup=true">NurPhoto via Getty Images</a></span></figcaption></figure><p><em>In the fast-paced world of cryptocurrency, vast sums of money can be made or lost in the blink of an eye. In early November 2022, the second-largest cryptocurrency exchange, FTX, was valued at more than US$30 billion. By Nov. 14, <a href="https://www.cnn.com/2022/11/15/business/ftx-madoff-bankman-fried-bair/index.html">FTX was in bankruptcy proceedings</a> along with more than 100 companies connected to it. <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">D. Brian Blank</a> and <a href="https://scholar.google.com/citations?user=FKJSqjEAAAAJ&hl=en&oi=ao">Brandy Hadley</a> are professors who study finance, investing and fintech. They explain how and why this incredible collapse happened, what effect it might have on the traditional financial sector and whether you need to care if you don’t own any cryptocurrency.</em></p>
<h2>1. What happened?</h2>
<p>In <a href="https://inside.com/campaigns/inside-tech-2021-07-21-28706/sections/243700">2019</a>, Sam Bankman-Fried founded FTX, a company that ran one of the largest cryptocurrency exchanges.</p>
<p>FTX is where many crypto investors trade and hold their cryptocurrency, similar to the New York Stock Exchange for stocks. Bankman-Fried is also the founder of <a href="https://www.forbes.com/profile/alameda-research/?sh=563773816570">Alameda Research</a>, a hedge fund that trades and invests in cryptocurrencies and crypto companies. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A photo of a curly-haired man." src="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495729/original/file-20221116-18-annb65.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sam Bankman-Fried founded both FTX and the investment firm Alameda Research. News sources have reported some less-than-responsible financial dealings between the two companies.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/sam-bankman-fried-founder-and-ceo-of-ftx-testifies-during-news-photo/1237105664?phrase=sam%20bankman-fried&adppopup=true">Tom Williams via Getty Images</a></span>
</figcaption>
</figure>
<p>Within the traditional financial sector, these two companies would be separate firms entirely or at least have divisions and firewalls in place between them. But in early November 2022, news outlets reported that a <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/">significant proportion of Alameda’s assets</a> were a type of cryptocurrency released by FTX itself. </p>
<p>A few days later, news broke that FTX had allegedly been loaning customer assets to Alameda for risky trades <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">without the consent of the customers</a> and also issuing its own FTX cryptocurrency for Alameda to use as <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">collateral</a>. As a result, criminal and regulatory investigators began scrutinizing FTX for potentially <a href="https://www.law360.com/assetmanagement/articles/1549319?nl_pk=c7efe457-0cc1-4a20-9d63-ded5145502ae&utm_source=newsletter&utm_medium=email&utm_campaign=assetmanagement&utm_content=2022-11-15&read_more=1&nlsidx=0&nlaidx=0">violating securities law</a>.</p>
<p>These two pieces of news basically led to a bank run on FTX.</p>
<p>Large crypto investors, like FTX’s competitor Binance, as well as individuals, began to <a href="https://decrypt.co/113723/investors-withdrawal-millions-from-ftx-binance-begins-liquidating-ftt-token">sell off cryptocurrency held on FTX’s exchange</a>. FTX quickly lost its ability to meet customer withdrawals and halted trading. On Nov. 14, FTX was also hit by an apparent <a href="https://www.coindesk.com/business/2022/11/14/ftx-hack-or-inside-job-blockchain-experts-examine-clues-and-a-stupid-mistake/">insider</a> <a href="https://edition.cnn.com/2022/11/12/business/ftx-hack/index.html">hack</a> and lost $600 million worth of cryptocurrency.</p>
<p>That same day, FTX, Alameda Research and 130 other affiliated companies founded by Bankman-Fried filed for bankruptcy. This action may leave <a href="https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html">more than a million</a> suppliers, employees and investors who bought cryptocurrencies through the exchange or invested in these companies with <a href="https://www.cnn.com/2022/11/14/business/ftx-customer-money-bankruptcy/index.html">no way to get their money back</a>.</p>
<p>Among the groups and individuals who held currency on the FTX platform were many of the normal players in the crypto world, but a number of more traditional investment firms also held assets within FTX. <a href="https://www.businessinsider.com/sequoia-loss-on-ftx-collapse-letter-to-investors-2022-11">Sequoia Capital</a>, a venture capital firm, as well as the <a href="https://www.theglobeandmail.com/business/article-ftx-ontario-teachers-pension-canada-regulators/">Ontario Teacher’s Pension</a>, are estimated to have held millions of dollars of their investment portfolios in ownership stake of FTX. They have both already written off these investments with FTX as lost.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A magnifying glass over the word cryptocurrency." src="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=357&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=357&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=357&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=449&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=449&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495732/original/file-20221116-16-xgz7nh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=449&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">While there has been some movement to regulate cryptocurrency, enforcement is still lacking.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/cryptocurrency-royalty-free-image/1355796318?phrase=crypto%20magnifying%20glass&adppopup=true">Solidcolours/E+ via Getty Images</a></span>
</figcaption>
</figure>
<h2>2. Did a lack of oversight play a role?</h2>
<p>In traditional markets, corporations generally <a href="https://www.law360.com/bankruptcy/articles/1549089?nl_pk=6ef803a8-f435-44cb-93f5-de6a024ff206&read_more=1&nlsidx=0&nlaidx=3">limit the risk they expose themselves to</a> by maintaining liquidity and solvency. Liquidity is the ability of a firm to sell assets quickly without those assets losing much value. Solvency is the idea that a company’s assets are worth more than what that company owes to <a href="https://www.wsj.com/livecoverage/stock-market-news-today-11-15-2022/card/ftx-says-number-of-creditors-in-bankruptcy-could-top-1-million-LrfYrHxDtIoVBV42QDiG?mod=djemMoneyBeat_us">debtors and customers</a>.</p>
<p>But the crypto world has generally operated with much less caution than the traditional financial sector, and <a href="https://www.nytimes.com/2022/11/11/technology/ftx-investors-venture-capital.html?smid=tw-dealbook&smtyp=cur">FTX is no exception</a>. About <a href="https://www.bloomberg.com/opinion/articles/2022-11-14/ftx-s-balance-sheet-was-bad">two-thirds</a> of the money that FTX owed to the people who held cryptocurrency on its exchange – roughly $11.3 billion of $16 billion owed – was backed by illiquid coins created by FTX. FTX was taking its customers’ money, giving it to Alameda to make risky investments and then creating its own currency, known as FTT, as a replacement – cryptocurrency that it was unable to sell at a high enough price when it needed to.</p>
<p>In addition, nearly 40% of Alameda’s assets were in FTX’s own cryptocurrency – and remember, both companies were founded by the same person. </p>
<p>This all came to a head when investors decided to sell their coins on the exchange. FTX did not have enough <a href="https://www.bloomberg.com/opinion/articles/2022-11-10/ftx-is-still-looking-for-money">liquid</a> assets to meet those demands. This in turn drove the value of FTT from over $26 a coin at the beginning of November to under $2 by Nov. 13. By this point, FTX owed more money to its customers than <a href="https://www.bloomberg.com/opinion/articles/2022-11-09/bankman-fried-s-ftx-had-a-death-spiral-before-binance-deal">it was worth</a>.</p>
<p>In regulated exchanges, investing with customer funds is <a href="https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-funds-without-raising-alarm-bells-say-sources.html">illegal</a>. Additionally, auditors validate financial statements, and firms must publish the amount of money they hold in reserve that is available to fund customer withdrawals. And even if things go wrong, the <a href="https://www.firstrepublic.com/insights-education/sipc-vs-fdic-insurance-protection-differences">Securities Investor Protection Corporation</a> – or SIPC – protects depositors against the loss of investments from an exchange failure or financially troubled brokerage firm. None of these guardrails are in place within the crypto world.</p>
<h2>3. Why is this a big deal in crypto?</h2>
<p>As a result of this meltdown, the company Binance is now considering creating an <a href="https://techxplore.com/news/2022-11-binance-fund-crypto-future-failures.html">industry recovery fund</a> – akin to a private version of SIPC insurance – to <a href="https://www.bloomberg.com/news/articles/2022-11-14/binance-ceo-cz-zhao-bids-to-replace-ftx-s-sam-bankman-fried-as-crypto-savior">avoid</a> future <a href="https://www.law360.com/bankruptcy/articles/1548995?nl_pk=6ef803a8-f435-44cb-93f5-de6a024ff206&read_more=1&nlsidx=0&nlaidx=4">failures</a> of crypto exchanges.</p>
<p>But while the collapse of FTX and Alameda – valued at more than $30 billion and now essentially worth nothing – is dramatic, the bigger implication is simply the potential <a href="https://apnews.com/article/sam-bankman-fried-ftx-crypto-downfall-a2eaec231027dfd9f18426ff8982bbf8">lost trust in crypto</a>. Bank runs are rare in traditional financial institutions, but they are <a href="https://www.wsj.com/articles/crypto-com-withdrawals-rise-after-ceo-admits-transaction-problem-11668350510">increasingly common</a> in the crypto space. Given that Bankman-Fried and FTX were seen as some of the biggest, most trusted figures in crypto, these events may lead more investors to think twice about putting money in crypto.</p>
<h2>4. If I don’t own crypto, should I care?</h2>
<p>Though investment in cryptocurrencies has grown rapidly, the entire crypto market – <a href="https://www.coindesk.com/markets/2021/10/21/crypto-market-cap-surges-to-new-record-27-trillion/">valued at over $3 trillion</a> at its peak – is much <a href="https://beincrypto.com/institutional-investment-in-crypto-experts-weigh-in-on-implications/">smaller</a> than the $120 trillion <a href="https://medium.com/ngrave/too-big-to-fail-crypto-market-size-vs-traditional-assets-eff4bb2ec529">traditional stock market</a>.</p>
<p>While investors and regulators are still evaluating the consequences of this fall, the impact on any person who doesn’t personally own crypto will be minuscule. It is true that many larger investment funds, like BlackRock and the Ontario Teachers Pension, held investments in FTX, but the estimated <a href="https://www.ai-cio.com/news/ontario-teachers-pension-could-lose-95-million-on-ftx-investment">$95 million the Ontario Teachers Pension lost</a> through the collapse of FTX is just 0.05% of the entire fund’s investments.</p>
<p>The takeaway for most individuals is not to invest in <a href="https://www.wsj.com/articles/ftx-sam-bankman-fried-sit-in-the-crosshairs-of-u-s-prosecutors-11668398012?mod=djem10point">unregulated</a> markets without understanding the risks. In high-risk environments like <a href="https://www.natlawreview.com/article/ftx-bankruptcy-and-question-prudent-retirement-plan-investments-saga-continues">crypto</a>, it’s possible to lose everything – a lesson investors in FTX are learning the hard way.</p><img src="https://counter.theconversation.com/content/194692/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even though some traditional financial firms parked millions in the bankrupt company – once valued at $30 billion – the impact of FTX’s spectacular crash is limited to crypto investorsD. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityBrandy Hadley, Associate Professor of Finance and the David A. Thompson Professor in Applied Investments, Appalachian State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1862672022-10-28T15:32:38Z2022-10-28T15:32:38ZBankers need to be personally liable to avoid future financial crises — new research<figure><img src="https://images.theconversation.com/files/475649/original/file-20220722-17-9bef0m.jpg?ixlib=rb-1.1.0&rect=117%2C50%2C5474%2C4141&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-modern-office-looking-city-falling-226014652">Shutterstock/ImageFlow</a></span></figcaption></figure><p>Most financial crises have plenty in common. They tend to start in the banking sector and involve excessive borrowing, together with an asset bubble, usually related to property. </p>
<p>The <a href="https://www.britannica.com/event/financial-crisis-of-2007-2008">global crisis of 2008</a> was no different, with the asset bubble focused on US real estate. But my <a href="https://www.mdpi.com/1911-8074/15/6/245">research</a> suggests this crisis had another underlying cause – that some people in the banking sector were playing or “gaming” the system for their own financial gain. </p>
<p>The game being played had several important features. First was the deliberate complexity of the financial products at its core – in particular the products based on pooling residential mortgage loans (called “mortgage-backed securities”) that were sold by banks to other banks and institutional investors. </p>
<p>These products were issued by the very banks that had offered the mortgages to customers who did not earn enough to pay the mortgage interest, and relied on ever-increasing house prices to stay afloat. </p>
<p>Then there are the behavioural biases that pervade decision-making at all levels of the banking industry. My research found that banking can often attract a certain kind of person: those who are prone to overconfidence, excessive risk-taking and, in some cases, psychopathic behaviour. </p>
<p>Such people tend to like complexity for its own sake. But they often do not fully understand the implications of that complexity for the stability of the financial system as a whole. Often they do not care – they are primarily interested in gaming the system to maximise their bonuses.</p>
<p>The next element is risk. There are parts of the banking sector that will always be prone to risk, but my research suggests that many bankers have come to feel immune to its potential impact. Instead, they are comforted and emboldened by the view that, however recklessly banks behave, governments – and hence taxpayers – will always be there to bail them out. </p>
<p>Meanwhile, <a href="https://theconversation.com/three-years-after-uks-banking-crisis-will-reforms-deliver-3361">financial regulators attempt</a> to set out effective rules and codes to mitigate risk. But this usually results only in a continual game of cat and mouse with an industry constantly seeking to circumvent any regulations they consider too onerous. </p>
<h2>Game over?</h2>
<p>Given all of this, there are no effective measures that any government would be prepared to introduce to deal with this situation. There have been no serious attempts to recognise or address the issue of product complexity, and when it comes to dealing with behaviour and personality types, everyone – including employees, managers, directors and even regulators – is susceptible.</p>
<p>Previous attempts to combat systemic risk in finance were based on the underlying assumption that the financial system is rational and that bankers want to behave rationally if they are given the right incentives. But these assumptions, my research indicates, are questionable. </p>
<p>Gaming in the banking sector seems virtually impossible to eliminate. The only effective measure to end it would be to make bankers personally liable for losses, to remove the sense that their actions – their games – have no personal financial or legal consequences. </p>
<p>It is this, rather than <a href="https://www.bbc.co.uk/news/business-63290169?at_medium=RSS&at_campaign=KARANGA">removing the cap</a> on bankers’ bonuses, that has the best chance of preventing the financial system blowing up again.</p>
<figure class="align-center ">
<img alt="New York skyscraper above Wall Street sign." src="https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/475651/original/file-20220722-3516-mmvfpe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Beware the game playing wolves.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wall-street-sign-nyc-1278206197">Shutterstock/Krzysztof Stefaniak</a></span>
</figcaption>
</figure>
<p>However, no government has ever passed such a law. And no single government could do so on its own, since this would immediately cause their entire national banking sector to move wholesale to another jurisdiction. </p>
<p>The law would have to be introduced simultaneously in all countries – and the probability of this happening is negligible. In short, the only effective measure to limit gaming will not, and cannot, be introduced. </p>
<p>This may seem like a bleak conclusion, and in many ways it is – particularly for taxpayers. But there is a more positive alternative, which entails the industry returning to the simple products that the banks, their regulators and their customers understand. In most cases the complexity is unnecessary.</p>
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Read more:
<a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">Bankers bonus cap: why scrapping it could hurt the UK economy</a>
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<p>For we should not forget that the main functions of banks are pretty straightforward: to raise funds from depositors and wholesale markets in order to lend to households and businesses. Banks have been providing these services successfully for centuries. But today bankers are not interested in simple products – because they are more difficult to game.</p>
<p>Until that changes, the really important lesson of the global financial crisis is that it is bound to be repeated. The “great game” will never end.</p><img src="https://counter.theconversation.com/content/186267/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Blake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research suggests financial regulators will never win.David Blake, Professor of Finance & Director of Pensions Institute, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1901112022-09-07T13:08:09Z2022-09-07T13:08:09ZCost of living crisis: why plans to reform the Bank of England won’t help it stop spiralling inflation<figure><img src="https://images.theconversation.com/files/483182/original/file-20220907-18-oi2zhy.jpg?ixlib=rb-1.1.0&rect=31%2C46%2C5145%2C3399&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Bank of England, London</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bank-england-your-travel-concept-704695771">aslysun / Shutterstock</a></span></figcaption></figure><p>The UK cost of living crisis has been building since early 2021. At 10.1%, the current rate of consumer price inflation is the highest in 40 years and the <a href="https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising#:%7E:text=The%20rate%20of%20inflation%20is,over%20the%20past%20few%20months%5D(https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising#:%7E:text=The%20rate%20of%20inflation%20is,over%20the%20past%20few%20months">Bank of England</a> believes it could pass 13% in October. </p>
<p>The pressure of price inflation on UK household budgets has been compounded by the fact that wage growth has not kept up. A 2.8% drop in <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/july2022">average real wages</a> between March and May 2022 has left many people with little room in their budgets to afford rising prices. Add to this the <a href="https://www.taxpayersalliance.com/taxpayers_alliance_finds_average_tax_level_is_highest_in_70_years">highest tax burden</a> in 70 years and it’s no wonder UK households are struggling.</p>
<p>The government created a <a href="https://www.gov.uk/government/news/one-in-four-families-get-first-government-cost-of-living-payment-from-today">£37 billion</a> cost of living support deal earlier this year to support households. Since then, however, the country’s dire economic situation has been used as political football. Both candidates for the leadership of the Conservative Party spent the past few months suggesting economic policies designed to appeal to the <a href="https://uk.news.yahoo.com/liz-truss-announced-prime-minister-101405789.html#:%7E:text=170%2C000%20Conservative%20Party%20Members">170,000 Conservative party members</a>, a group that is <a href="https://www.ft.com/content/1454fe21-5b2e-459c-966c-65fd48d52f8f">predominantly</a> white, British, male, Brexit-leaning, affluent and educated. </p>
<p>In addition to putting forward a low-tax strategy to boost economic growth, the eventual winner and new UK prime minister, Liz Truss, has also suggested reform of the UK’s central bank might be in order. But the kinds of changes she has suggested are unlikely to help the Bank of England tackle inflation and could actually threaten its <a href="https://journals.sagepub.com/doi/pdf/10.1177/0027950106067048">independence from political control</a>.</p>
<h2>Tackling inflation</h2>
<p>Some commentators have dubbed the Bank of England’s governor Andrew Bailey the “<a href="https://twitter.com/dailystar/status/1489738205750509568?lang=en">plank of England</a>” in response to his claims that he could not have <a href="https://www.ft.com/content/3d9d2b51-ded8-413f-918e-bfc39a85afe2">foreseen this economic crisis</a>. In Bailey’s defence, the Bank of England has a toolkit full of fairly blunt instruments when it comes to managing severe inflation. </p>
<p>Its main function is to set monetary policy, which means influencing how much money is available in the economy and how much it costs people and businesses to borrow. Adjusting the Bank of England base rate is the main way to do this, but this involves a balancing act. </p>
<p>Increasing the base rate risks curtailing demand and investment, worsening the <a href="https://www.reuters.com/world/uk/liz-truss-inherits-uk-economy-heading-recession-new-pm-2022-09-05/">expected recession</a>. On the other hand, reducing interest rates could exacerbate the already increasing levels of consumption of goods, potentially causing further inflation. </p>
<p><strong>Rising UK inflation</strong></p>
<iframe src="https://d3fy651gv2fhd3.cloudfront.net/embed/?s=ukrpcjyr&v=202208170626V20220312&d1=20210907&type=type=column&h=300&w=600" height="300" width="100%" frameborder="0" scrolling="no"></iframe>
<p>The recent accusations over the Bank’s inability to keep inflation in line with its <a href="https://www.bankofengland.co.uk/monetary-policy/inflation">2% target</a> prompted Truss to <a href="https://www.theguardian.com/politics/2022/aug/05/truss-irresponsible-for-threatening-to-review-bank-of-england-remit">suggest a review</a> of the Bank’s remit during the Conservative party leadership contest. While Truss has since <a href="https://www.telegraph.co.uk/business/2022/09/04/liz-truss-confirms-belief-bank-england-independence/">confirmed her belief in the independence</a> of the bank from government control, she has backed a <a href="https://www.cityam.com/exclusive-truss-backs-bank-of-england-review-to-ensure-it-is-fit-for-purpose/">review</a> into the targets it uses. </p>
<p>Truss has proposed shifting the emphasis away from the Bank’s current 2% target towards maintaining a nominal gross domestic product (GDP) growth target. This would see the bank make monetary policy decisions aimed at hitting a certain level of GDP growth, rather than trying to keep inflation at a specific level. This would see the Bank focus on attaining growth when managing the economy, rather than targeting price stability as it does now.</p>
<p>The blunt instruments currently at the Bank’s disposal have limited ability to affect demand-led growth, however. The UK economy is well on the path for a recession by the end of the year, so such a change would make no difference in the present crisis. As such, it’s unlikely this would really address the current inflation situation. </p>
<p>What such a change would do is increase the connection between the central bank and political representatives, however. The Bank of England has acted <a href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/what-has-central-bank-independence-ever-done-for-us-speech-by-andy-haldane.pdf">independently</a> of political control since 1997. And while a mandate review would not necessarily erode this independence, any interest in guiding the central bank and holding its governor accountable to government could affect its ability to hold long-term policy ambitions free of political influence. </p>
<p>On the other hand, Truss could encourage a little more <a href="https://www.elgaronline.com/configurable/content/book$002f9781839100932$002fbook-part-9781839100932-9.xml?t:ac=book%24002f9781839100932%24002fbook-part-9781839100932-9.xml">integration</a> between the monetary policy set by the Bank of England and the fiscal policy set by the government’s spending and tax objectives. Since the bulk of inflation is caused by rising costs faced by firms who produce goods and services, government fiscal policy would be more effective in tackling it than the Bank’s monetary policy anyway.</p>
<h2>Reforming financial regulation</h2>
<p>The new prime minister also wants to shake up the UK’s financial regulators. While <a href="https://www.reuters.com/world/uk/uks-liz-truss-would-review-financial-watchdogs-roles-says-source-2022-08-18/">little detail</a> has been provided by Truss about this plan, news reports say it could involve a merger of the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). This would take the PRA out of the control of the Bank of England, where it was placed after the 2007-2008 global financial crisis. </p>
<p>The Bank of England is tasked with <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking#:%7E:text=A%20key%20role%20of%20central,major%20changes%20over%20recent%20decades.">maintaining the stability</a> of the economy and ought to have a view beyond the short term. And since the PRA is tasked with looking at the stability of the financial system, it contributes greatly to the situational awareness of the central bank. </p>
<p>This kind of awareness was very much absent before the global financial crisis. Separating the PRA from the Bank could risk creating a similar blind spot in future.</p>
<p>A <a href="https://bills.parliament.uk/bills/3326">financial services and markets bill</a> put before UK parliament in July 2022 also proposes adding promotion of growth to the remit of the existing regulators. This plan is worrying because it would expose the regulators to the government’s fiscal policy objectives. </p>
<p>Requiring financial regulators to focus on GDP growth targets would challenge the independence of the organisations tasked with maintaining stability and order in the UK financial system.</p><img src="https://counter.theconversation.com/content/190111/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Reforming the Bank of England to help it tackle inflation may end up compromising its independence.Shampa Roy-Mukherjee, Associate Professor in Economics, University of East LondonMichael Harrison, Lecturer in Finance and FinTech, University of East LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1847612022-06-10T14:16:26Z2022-06-10T14:16:26ZBuy now pay later: how to protect consumers without regulating it out of existence<figure><img src="https://images.theconversation.com/files/468196/original/file-20220610-16487-4fclax.jpg?ixlib=rb-1.1.0&rect=1210%2C240%2C2054%2C1920&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The BNPL market is booming but users need better protections through balanced financial regulation.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bnpl-buy-now-pay-later-online-2063408687">Shutterstock</a></span></figcaption></figure><p>Calls to regulate the booming “buy now, pay later” (BNPL) industry have not deterred big brands like <a href="https://theconversation.com/buy-now-pay-later-apple-will-now-lend-you-money-to-keep-you-spending-and-expand-its-empire-184550">Apple</a> and <a href="https://home.barclays/news/press-releases/2021/12/amazon-teams-up-with-barclays-to-enable-customers-to-pay-in-inst/">Amazon</a> from the idea of offering consumers an interest-free, no-fee way to spread payments for purchases. Apple cited “<a href="https://www.apple.com/uk/newsroom/2022/06/apple-unveils-new-ways-to-share-and-communicate-in-ios-16/">users’ financial health</a>” when it announced this new feature, but research shows financially vulnerable people need more protection.</p>
<p>It’s possible to regulate this sector to safeguard consumers without completely restricting access. By learning lessons from previous efforts to regulate the payday lending sector, for example, the industry and its regulators could take steps to prevent misuse.</p>
<p>The use of BNPL payment platforms <a href="https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf">almost quadrupled</a> in 2020, with transaction values reaching £2.7 billion. <a href="https://www.bain.com/globalassets/noindex/2021/bain_report_buy_now_pay_later-in-the-uk.pdf">In 2021</a>, UK BNPL transaction value grew by as much as 70% to £6.4 billion or 5% of the total e-commerce market. </p>
<p>This form of credit allows people to pay for online purchases in instalments, without a credit record check. It tends to attract younger borrowers, with a quarter of users aged 18-24 years old and half aged 25-36 years old, <a href="https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf">according to data</a> shared by providers with the UK’s financial regulator, the Financial Conduct Authority (FCA). </p>
<p>Unfortunately, it has also encouraged some shoppers to <a href="https://www.which.co.uk/news/article/from-laybuy-to-klarna-how-safe-is-buy-now-pay-later-online-awAjp3K6TTeb">spend more</a> than they can afford. Citizens Advice says two in five BNPL users have <a href="https://www.citizensadvice.org.uk/Global/CitizensAdvice/Debt%20and%20Money%20Publications/BNPL%20Debt%20Collection%20(1).pdf">struggled to repay</a>, and one in four of those that have missed a payment have been contacted by debt collectors. </p>
<p>And while BNPL was conceived as a convenient way to purchase big-ticket items such as sofas and TVs, the rising cost of living means people are now using it to <a href="https://www.theguardian.com/money/2022/jan/29/buy-now-pay-later-grocery-schemes-are-a-debt-trap-for-struggling-families">pay for essentials</a> such as food and toiletries. Research has also found that users who are unable to repay their BNPL sometimes use <a href="http://dx.doi.org/10.2139/ssrn.4001909">credit cards</a> with typical interest rates of 20% to delay repaying their debt.</p>
<figure class="align-center ">
<img alt="Woman with bills and credit cards." src="https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/468204/original/file-20220610-28309-r4ymb5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Some BNPL borrowers are using credit cards to manage their installments.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/top-view-stressed-young-asian-woman-785560924">Shutterstock</a></span>
</figcaption>
</figure>
<p>A rise in overstretched users is not only detrimental to consumers, it could also damage businesses. Retailers have <a href="https://www.bain.com/globalassets/noindex/2021/bain_report_buy_now_pay_later-in-the-uk.pdf">increasingly relied</a> on BNPL to boost sales by allowing people to spread the cost of goods over a series of payments. They pay the provider a fee for the purchased goods and the BNPL business model is reliant on consumers’ repeat use. </p>
<p>Retailers have used this to navigate recent challenges like Brexit and COVID-19. Up to 92% of merchants <a href="https://www.bain.com/globalassets/noindex/2021/bain_report_buy_now_pay_later-in-the-uk.pdf">surveyed last year</a> had integrated their first BNPL solution since early 2020. But the rising cost of living crisis has changed the economics of this form of credit for all involved. </p>
<h2>Regulatory lessons</h2>
<p>As a result, regulation looks increasingly likely, and necessary, to provide consumers with greater protection from financial harm. The FCA has already enforced <a href="https://www.fca.org.uk/news/press-releases/fca-secures-contract-changes-buy-now-pay-later-customers">new contractual changes</a> to terms and conditions to help protect consumers using Klarna, Clearpay, Laybuy and Openpay. These new measures include protecting consumers that cancel their goods through BNPL from being charged a late payment fee. </p>
<p>At the moment, the hope is that other providers will follow suit. This regulation needs to be enforced across the sector in a way that shields consumers without removing access to this form of finance.</p>
<p>The regulation of payday lending in 2015 provides valuable lessons for BNPL. My research on the <a href="https://doi.org/10.1017/S004727942100026X">experience of borrowers</a> shows that, while “high-cost, short-term” credit regulation protected users from falling into too much debt, it also excluded many people from accessing this credit at all. </p>
<p>Ultimately, this regulation restricted consumer choice by forcing several high-profile lenders into <a href="https://theconversation.com/wongas-collapse-and-what-it-means-for-the-people-who-rely-on-payday-loans-102419">administration</a>. Their <a href="https://www.bbc.co.uk/news/business-45359395">business models</a> no longer worked due to the stricter rules on lending and a cap on the cost of credit, combined with an influx of pre-regulation compensation claims.</p>
<h2>Protecting consumers</h2>
<p>Financial regulation that aims to protect consumers must support those on the lowest incomes that are shouldering the greatest burden in the cost of living crisis. More generally, an uplift in benefits in line with inflation would be useful. Credit is not always the right solution, but affordable community finance providers such as credit unions and community development finance institutions should also be promoted. </p>
<figure class="align-center ">
<img alt="Computer, coffee, phone credit card, yellow background" src="https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/468206/original/file-20220610-35185-c6buqm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Balanced regulation can both protect consumers and maintain access to this form of credit.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/top-view-online-shopping-credit-card-1699531609">Shutterstock</a></span>
</figcaption>
</figure>
<p>For BNPL regulation specifically, regulators can and should design rules that will ensure that consumers are protected but also able to continue to use this increasingly popular form of finance. According to my research, the following measures would help:</p>
<ul>
<li>Clarifying that BNPL is a form of credit and the implications of using it so that consumers can make informed decisions. </li>
<li>Ensuring providers make sufficient and appropriate checks about whether consumers can afford to repay loans alongside their other financial commitments to reduce overall debt. This would rely on access to real-time data to prevent multiple loans with multiple providers.</li>
<li>Adding greater <a href="https://www.financial-ombudsman.org.uk/consumers/complaints-can-help/credit-borrowing-money/goods-services-bought-credit#:%7E:text=If%20you%20used%20a%20credit,a%20point%20of%20sale%20loan">consumer goods protection</a> to match other forms of credit such as credit cards, which offer a refund if goods are lost or damaged.</li>
</ul>
<p>The BNPL model is unlikely to disappear any time soon. Instead, BNPL companies are already starting to adapt to a more regulated future by changing their business models to some extent. For example, Klarna’s moves to <a href="https://www.bbc.co.uk/news/business-61293257">report its data</a> to credit scoring companies certainly indicates it is pre-empting regulation of the sector, as well as an economic slowdown that could curb its growth in the near future. </p>
<p>Even with this outlook, however, confidence in the sector remains. Thoughtful regulation will ensure present players and new entrants can build responsible BNPL offerings that online shoppers can continue to add to their baskets.</p><img src="https://counter.theconversation.com/content/184761/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Appleyard receives funding from the abrdn Financial Fairness Trust and Barrow Cadbury Trust. </span></em></p>The UK’s cost of living crisis has exposed the financial vulnerability of consumers, especially those using ‘buy now, pay later’ products.Lindsey Appleyard, Assistant Professor, Coventry UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1795342022-03-22T13:04:37Z2022-03-22T13:04:37ZSEC proposes far-reaching climate disclosure rules for companies – here’s where the rules may be vulnerable to legal challenges<figure><img src="https://images.theconversation.com/files/453522/original/file-20220322-25-5c2fi7.jpg?ixlib=rb-1.1.0&rect=1038%2C719%2C3754%2C2339&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The SEC's proposed rules include some reporting of so-called Scope 3 emissions, in companies' supply chains and use of their products.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SupplyChainShipping/5a46d4cc50014b66a479457effac16d2/photo">AP Photo/Noah Berger</a></span></figcaption></figure><p>The U.S. <a href="https://www.sec.gov/">Securities and Exchange Commission</a> released its <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">long-awaited proposal</a> to require companies to disclose their climate risks to investors, and it’s arguably the most significant action on climate change yet under the Biden administration.</p>
<p>SEC Commissioner <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">Allison Herren Lee called</a> it a “watershed moment for investors and financial markets.” It is also a win for President Joe Biden, whose <a href="https://www.nbcnews.com/politics/congress/manchin-says-build-back-better-dead-here-s-what-he-n1288492">other climate efforts have struggled</a>. A year ago, <a href="https://www.reuters.com/article/us-usa-congress-financial-regulators/bidens-sec-nominee-vows-review-of-gamestop-trading-issues-climate-disclosures-idUSKBN2AU136">Biden appointed</a> an SEC chairman, Gary Gensler, who supports climate disclosures in principle.</p>
<p>The proposed requirements, once finalized, could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, simultaneously strengthening both markets and the nation’s climate response.</p>
<p>But the proposal has a long way to go before it can make the transformative changes it aims for. We study <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">climate regulation and business law</a> and have closely tracked debates over the proposal. Here’s what you need to know.</p>
<h2>What the rule would do</h2>
<p>If the SEC votes to finalize the rule after a public comment period, it would standardize, extend and mandate disclosure requirements that the SEC encouraged <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">in a guidance document back in 2010</a>.</p>
<p>As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">510-page notice</a> released on March 21, 2022, makes clear, companies would be expected to include a laundry list of items in their regular filings with the SEC: information on the company’s “oversight and governance of climate-related risks,” any expected climate-related risks it faces in the future, any transition plans the business has developed, and data on certain greenhouse gas emissions linked to the company’s operations, among other things.</p>
<p>Gensler said the <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321https:/www.sec.gov/news/statement/gensler-climate-disclosure-20220321">proposal draws from</a> the approach of the <a href="https://www.fsb-tcfd.org/">Task Force on Climate-Related Financial Disclosure</a>, which several countries have adopted. But the proposal is still noticeably less stringent than the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32020R0852">European Union’s regulations</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>In the leadup to the release of the SEC’s proposal, <a href="https://theconversation.com/sec-will-consider-climate-disclosure-rules-for-us-companies-on-march-21-its-already-facing-threats-of-lawsuits-178304">supporters and opponents speculated</a> about whether so-called Scope 3 emissions would be required. Under the terms of the proposal, the answer is a resounding “maybe.”</p>
<p>A company’s Scope 3 emissions result from activities of third parties, such as the emissions produced by its suppliers or, ultimately, by its consumers. As the <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">SEC pointed out</a>, these emissions can “represent a majority of the carbon footprint for many companies.”</p>
<figure class="align-center ">
<img alt="Lists of examples of Scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What Scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkin/Center for American Progress</a></span>
</figcaption>
</figure>
<p>While <a href="https://www.sec.gov/files/33-11042-fact-sheet.pdf">all registered companies would be required</a> to disclose their own direct greenhouse emissions, such as emissions from manufacturing processes, as well as indirect emissions through the use of energy – Scopes 1 and 2, respectively – only some companies would need to report Scope 3 emissions under the proposal.</p>
<p>The proposal would exempt “<a href="https://www.sec.gov/corpfin/cf-manual/topic-5">small reporting companies</a>” from Scope 3 reporting. It would allow large companies to withhold Scope 3 emissions data when the company determines that the data are not “<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">material</a>” to investors or if the company doesn’t have Scope 3 emissions targets or goals.</p>
<p>Public interest groups wanted the SEC to require disclosure of even non-material Scope 3 emissions, while industry groups pushed for the SEC to forgo any Scope 3 emissions mandate. The SEC appears to have split the baby.</p>
<h2>It’s not over ‘til it’s over</h2>
<p>The SEC’s proposal initiates what can be a perilous process of public vetting before the rule goes into effect.</p>
<p>First, the SEC will take public comments on the proposal for the next 60 days. The agency received about <a href="https://www.sec.gov/news/statement/gensler-climate-disclosure-20220321">600 unique comments</a> in its request for information before issuing the proposal. Now, with more details available, there should be substantially more engagement. When the Federal Communications Commission took public comment on its proposal to roll back net neutrality rules, it received almost <a href="https://www.pewresearch.org/internet/2017/11/29/public-comments-to-the-federal-communications-commission-about-net-neutrality-contain-many-inaccuracies-and-duplicates/">22 million comments</a>.</p>
<p>The SEC should expect to receive extensive comments both from opponents of any regulation and public interest groups that want more stringent regulations.</p>
<p><a href="https://h2o.law.harvard.edu/collages/15539">Under standard administrative law principles</a>, the SEC must consider and respond to any important arguments or data presented by public commenters. If it gets even a fraction of the comments the FCC got, this process could easily take half a year. </p>
<p>By design, this process is supposed to allow the SEC to change the terms of the proposal, although it <a href="https://h2o.law.harvard.edu/collages/44925">cannot change the proposal</a> so much that the public would not have understood during the comment period what the final rule would do.</p>
<h2>The courts lie in wait</h2>
<p>Now that the terms of the proposed rule are in place, it is easier to see where legal vulnerabilities might be.</p>
<p>Industries are likely to take issue with the SEC’s estimates of the costs companies will face to comply with the rules. <a href="https://www.sec.gov/rules/proposed/2022/33-11042.pdf">The SEC’s proposal</a> states that the cost could be “relatively small” if companies already provide similar information. The SEC will have to defend that assertion carefully.</p>
<p>In 2011, the U.S. Court of Appeals for the District of Columbia <a href="https://harvardlawreview.org/wp-content/uploads/pdfs/vol125_business_roundtable_v_SEC.pdf">threw out an SEC rule</a> on the grounds that it failed to adequately consider economic costs of compliance. Although <a href="https://www.acslaw.org/wp-content/uploads/old-uploads/originals/documents/Kraus%20and%20Raso%20-%20Rational%20Boundaries.pdf">that ruling has been widely criticized</a> for imposing a cost-benefit analysis requirement that is not required by law, the <a href="https://www.supremecourt.gov/opinions/14pdf/14-46_bqmc.pdf">U.S. Supreme Court seems sympathetic</a> to such a requirement.</p>
<p>Another vulnerability will stem from the SEC’s approach to Scope 3 emissions. </p>
<p>Both industries and public interest groups are likely to argue that the SEC misunderstood its statutory authorization – either because <a href="https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321">it included Scope 3 emissions</a> or because it <a href="https://www.sec.gov/news/statement/lee-climate-disclosure-20220321">believed it was limited</a> to “material” emissions, respectively. Or challengers could argue that SEC failed to fully analyze policy considerations favoring a different approach. How well the SEC responds to critical comments will be important when the courts are asked to decide if the SEC acted in an arbitrary or capricious or unlawful manner.</p>
<p>Finally, it is possible that the matter is out of the SEC’s hands. <a href="https://www.wsj.com/articles/the-secs-climate-change-overreach-global-warming-risks-lawmakers-invertors-market-data-11647801469">Some critics have suggested</a> that the regulation of climate disclosures is too important a question for regulators and belongs with Congress. Courts have sometimes shown skepticism toward agency actions that present so-called “<a href="https://www.theregreview.org/2022/01/31/driesen-major-questions-juristocracy/">major questions</a>,” including those related to <a href="https://www.natlawreview.com/article/court-cites-major-questions-doctrine-when-striking-down-biden-social-cost-carbon">climate change</a>.</p>
<p>If the courts view climate disclosure as a major question, they may vacate the rule even if the SEC has strongly supported its approach.</p>
<h2>A long way to go</h2>
<p>The SEC has taken a major step that could boost the Biden administration’s climate change agenda, but whether it will be able to navigate a treacherous administrative and legal process without changing its approach remains to be seen. </p>
<p>The notice of proposed rulemaking is usually just the opening offer in an ongoing negotiation over the rule.</p><img src="https://counter.theconversation.com/content/179534/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The SEC’s proposal would require companies to disclose their greenhouse gas emissions and other climate risks, but it’s not a done deal yet.Daniel E. Walters, Assistant Professor of Law, Penn StateWilliam M. Manson, Law Student, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1783042022-03-07T13:19:32Z2022-03-07T13:19:32ZSEC will consider climate disclosure rules for US companies on March 21 – it’s already facing threats of lawsuits<figure><img src="https://images.theconversation.com/files/450176/original/file-20220305-56947-9syz62.jpg?ixlib=rb-1.1.0&rect=8%2C41%2C5592%2C3686&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some corporate climate risks are easy to spot. Others are less evident.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/oil-refinery-royalty-free-image/108806525?adppopup=true">Paul Souders via Getty Images</a></span></figcaption></figure><p>Better information leads to better decisions – this is the idea behind a regulatory device known as “<a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">mandated disclosure</a>.” Mandated disclosures are all around you, from calorie counts on fast food restaurant menus to conversations with doctors around informed consent. </p>
<p>But the biggest experiment yet in mandated disclosure may be an expected U.S. Securities and Exchange Commission proposal to extend these ideas to climate impacts facing U.S.-listed companies. Climate disclosure rules would require publicly traded companies to release information to investors about their emissions and how they are managing risks related to climate change and future climate regulations.</p>
<p>While it is easy to spot climate change-related risks facing companies like <a href="https://www.morningstar.com/news/business-wire/20220302005309/exxonmobil-details-plans-to-lead-in-earnings-and-cash-flow-growth-energy-transition">ExxonMobil</a> that produces and sells fossil fuels that contribute to global warming, <a href="https://www.weforum.org/agenda/2021/03/climate-policies-transition-risks/">hidden vulnerabilities exist</a> for businesses across the U.S. economy. </p>
<p>Largely in response to <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8931883-245382.pdf">investors clamoring for more information</a> about climate risks, <a href="https://www.warren.senate.gov/imo/media/doc/2022.02.09%20Gensler%20Climate%20letter.pdf">as well as pressure</a> from <a href="https://www.sec.gov/comments/climate-disclosure/cll12-9360016-261669.pdf">green</a> <a href="https://www.sec.gov/comments/climate-disclosure/cll12-20109655-264012.pdf">groups</a> that believe disclosure will drive climate-conscious investing, <a href="https://www.sec.gov/news/speech/gensler-pri-2021-07-28">SEC Chair Gary Gensler announced</a> in 2021 that the commission would use its statutory authority to <a href="https://twitter.com/GaryGensler/status/1492269189289193472">require climate-related disclosures</a>. </p>
<p>The SEC <a href="https://twitter.com/GaryGensler/status/1502001539577176064">now plans</a> to consider proposals for climate-risk disclosure rules <a href="https://www.sec.gov/os/sunshine-act-notices/sunshine-act-notice-open-032122">at its March 21, 2022, meeting</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/xjSk7wWJG6o?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">SEC Chair Gary Gensler discusses what the SEC has to do with climate change.</span></figcaption>
</figure>
<p>As law scholars, we <a href="https://scholar.google.com/citations?user=2g3cGE4AAAAJ&hl=en">work on legal issues involving businesses and regulation</a>. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them. </p>
<h2>What investors want to know</h2>
<p>Investor pressure for better information about climate impacts comes from two directions. </p>
<p>First, some investors want to avoid companies that will be affected by climate change. The company’s products may be <a href="https://www.reuters.com/business/sustainable-business/exxon-under-investor-pressure-discloses-emissions-burning-its-fuels-2021-01-06/">regulated in the future</a> because of their impact on the climate, or its supply chains may get more expensive over time. Investors want to know which businesses will be able to adapt and preserve profitability. </p>
<p>Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social and governance factors. Today, <a href="https://www.ussif.org/blog_home.asp?Display=155">ESG investing</a> accounts for <a href="https://www.businesswire.com/news/home/20201116005284/en/The-US-SIF-Foundation%E2%80%99s-Biennial-%E2%80%9CTrends-Report%E2%80%9D-Finds-That-Sustainable-Investing-Assets-Reach-17.1-Trillion">US$17.1 trillion</a> — or 1 in 3 dollars — of the total U.S. assets under professional management. The challenge for the SEC is to ensure that claims being made about the sustainability of a company are <a href="https://www.economist.com/leaders/2021/05/22/sustainable-finance-is-rife-with-greenwash-time-for-more-disclosure">based on reality</a>. </p>
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Read more:
<a href="https://theconversation.com/esg-investing-has-a-blind-spot-that-puts-the-35-trillion-industrys-sustainability-promises-in-doubt-supply-chains-170199">ESG investing has a blind spot that puts the $35 trillion industry's sustainability promises in doubt: Supply chains</a>
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<p>The trend toward ESG investment has led to an outpouring of voluntary disclosure: <a href="https://www.wsj.com/articles/climate-fight-brews-as-sec-moves-toward-mandate-for-risk-disclosure-11624267803?mod=article_inline">About 90% of companies</a> in the <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview">S&P 500</a> publish voluntary reports disclosing statistics on things like carbon emissions and how much renewable energy they use. </p>
<p>Some large investors require disclosure. For example, <a href="https://www.blackrock.com/us/individual">BlackRock</a>, a multinational asset manager with around $10 trillion under its control, requires companies it invests in to disclose certain climate information. The <a href="https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law">United Kingdom</a> plans to require climate disclosure starting in April 2022, and the <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/corporate-disclosure-climate-related-information_en">European Union</a> has reporting rules in place. </p>
<p>But the U.S. has been slow to impose mandatory climate disclosure requirements. Public companies have only been subject to a more general <a href="https://www.jurist.org/features/2021/11/22/explainer-the-sec-climate-disclosures-and-a-new-global-standard/">legal standard</a> that they not materially mislead investors. The SEC <a href="https://www.sec.gov/rules/interp/2010/33-9106.pdf">released guidance</a> in 2010 to encourage climate disclosures, but <a href="https://crsreports.congress.gov/product/pdf/R/R46766">it was unenforced</a> and failed to prompt standardized disclosures.</p>
<h2>Rule benders and the effectiveness of disclosure</h2>
<p>Research on the broader use of mandated disclosure, such as for <a href="https://www.jstor.org/stable/41149884?seq=1#metadata_info_tab_contents">home mortgage lending</a> and <a href="https://www.fca.org.uk/insight/can-performance-based-regulation-succeed-where-mandated-disclosure-has-failed">consumer product labeling</a>, shows that crafting effective disclosure regulations is difficult. </p>
<p>One reason is that the companies can easily evade disclosing useful information while still complying with the letter of the law. These “<a href="https://www.cambridge.org/core/books/incomprehensible/3BD00F26FB31EF2D8944D5B083B6A72C">rule benders</a>” can be very creative. Consider the restaurant in New York City that was subject to a health inspection grading regulation and managed to <a href="https://www.wsj.com/articles/BL-METROB-8013">disguise</a> its “B” rating by simply adding “EST” to its display of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information. </p>
<p>A <a href="https://doi.org/10.1038/s41558-021-01271-8">study of one type of climate disclosure</a> – emissions labels on consumer products – found mixed evidence as to whether consumers altered their behavior in response. Rule benders can exploit <a href="https://www.penguinrandomhouse.com/books/647557/too-much-information-by-cass-r-sunstein/">human tendencies</a> to discount or filter out warnings by providing an avalanche of unnecessary information that confuses and overwhelms the intended recipient. </p>
<h2>Expect court challenges</h2>
<p>One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “<a href="https://www.asyousow.org/press-releases/2022/3/8/sec-climate-disclosure-rulemaking">Scope 3”</a> <a href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">emissions</a>. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain. </p>
<p>A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have extensive downstream emissions when people drive its gas-powered vehicles. </p>
<figure class="align-center ">
<img alt="Lists of examples of scope 1, 2, 3 emissions sources with an illustration of a factory in the center" src="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=509&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=509&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=509&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=640&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=640&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450130/original/file-20220304-13-727hza.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=640&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">What scope 1, 2 and 3 emissions involve.</span>
<span class="attribution"><a class="source" href="https://www.americanprogress.org/article/why-companies-should-be-required-to-disclose-their-scope-3-emissions/">Chester Hawkins/Center for American Progress</a></span>
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<p>The SEC’s three Democratic commissioners, who make up a majority of the commission, <a href="https://www.natlawreview.com/article/internal-dissension-sec-delays-climate-change-disclosure-regulations">have reportedly split</a> on whether certain Scope 3 emissions can be viewed as “<a href="https://www.natlawreview.com/article/made-tv-sec-s-regulatory-posture-climate-risk">material</a>” to investors and therefore subject to disclosure. </p>
<p>“<a href="https://www.law.cornell.edu/cfr/text/17/240.12b-2">Material” is defined</a> as information that a reasonable person would consider important in making an investment decision. </p>
<p>Some critics of climate disclosures, including <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915606-244835.pdf">several Republican state attorneys general</a>, suggest that the SEC has no authority to require disclosures that are not financially material. Missouri’s attorney general wrote that requiring climate reporting would impose “<a href="https://www.sec.gov/comments/climate-disclosure/cll12-8915601-244834.pdf">large costs and administrative burdens</a>” on publicly traded companies. A group of senators suggested greenhouse gas-related assets would <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8911330-244285.pdf">shift to private companies</a>. West Virginia’s attorney general <a href="https://www.sec.gov/comments/climate-disclosure/cll12-8563794-230748.pdf">threatened to sue the SEC</a>. </p>
<p>The costs of disclosure would vary. Some companies already intensely monitor emissions. Others would likely face high costs if Scope 3 emissions were included. An oil company, for example, might have to <a href="https://cleanenergynews.ihsmarkit.com/research-analysis/oil-gas-companies-under-pressure-to-manage-scope-3-emissions-t.html">measure emissions from all the vehicles using its fuel</a>. </p>
<p>The Administrative Procedure Act allows courts to vacate SEC rules that are <a href="https://www.law.cornell.edu/uscode/text/5/706">deemed arbitrary or capricious</a> because the agency failed to offer sufficient justification for choosing the proposal over alternatives. The SEC is acutely aware of this risk. A prior oil and gas extraction disclosure rule <a href="https://www.jdsupra.com/legalnews/sec-resource-extraction-issuer-disclosu-84300/">was invalidated</a> by a court in 2013 as arbitrary and capricious. </p>
<h2>Proceeding with caution</h2>
<p>The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.</p>
<p>What the SEC does now will affect those future moves. No wonder it is taking its time and proceeding cautiously.</p>
<p><em>This article was updated March 10, 2022, with the SEC listing the climate disclosure rule on its March 21 agenda.</em></p><img src="https://counter.theconversation.com/content/178304/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some investors want publicly traded companies to disclose their full climate impact, including emissions from their supply chains and product use.Daniel E. Walters, Assistant Professor of Law, Penn StateWilliam M. Manson, Law Student, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1737362021-12-15T23:52:31Z2021-12-15T23:52:31ZAllan Fels: As ACCC chair, Gina Cass-Gottlieb will put the public interest first, despite years of fighting for business<figure><img src="https://images.theconversation.com/files/437908/original/file-20211215-27-141v3ai.png?ixlib=rb-1.1.0&rect=392%2C481%2C2616%2C1242&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Lukas Coch/AAP</span></span></figcaption></figure><p>The proposed appointment of <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/government-nominates-gina-cass-gottlieb-australian">Gina Cass-Gottlieb</a> as chair of the Australian Competition and Consumer Commission (ACCC) next year is welcome, as is the appointment of Liza Carver as ACCC enforcement commissioner. </p>
<p>If approved by a majority of the states, they will start in March.</p>
<p>Cass-Gottlieb is a fine appointment. She is widely regarded as the leading practitioner of competition law in Australia. Besides her outstanding skills, she has been adept at understanding the mind of the regulator and persuading clients to adapt their defence accordingly, quite often arriving at outcomes suitable for the defendant and the regulator.</p>
<p>A critical requirement is that the chair is a person of integrity who puts the public interest first. I believe Gina Cass-Gottlieb will do this despite years of being on the big business defence side. </p>
<p>I myself have urged her (and Liza Carver) to join the ACCC for over twenty years because I believe both have this essential attribute as well as the required skills. </p>
<p>Gina Cass-Gottlieb will be the first female chair since the establishment of competition institutions in the mid-1960s. </p>
<p>Interestingly, there has been a recent awakening by competition authorities and the OECD to the existence of gender issues in competition policy. </p>
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Read more:
<a href="https://theconversation.com/uncomfortable-comparisons-why-rod-sims-broke-the-accc-record-105730">Uncomfortable comparisons. Why Rod Sims broke the ACCC record</a>
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<p>To take but one example, as everyone knows there has been massive discrimination past and present against women in terms of access to jobs, education, finance, small business opportunities, and so on. </p>
<p>This discrimination is not only inherently objectionable, but also constitutes a substantial restriction to competition in itself.</p>
<p>It will be interesting to see if the new leadership team addresses these issues – at least in their advocacy. I doubt there will be much litigation on this subject.</p>
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<a href="https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437909/original/file-20211215-23-c83uoh.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Liza Carver, named enforcement commissioner.</span>
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<p>Liza Carver is also a very good appointment. In the 1990s, she was an associate commissioner of the ACCC for six years. </p>
<p>Her original background was from the consumer and public interest law community.</p>
<p>Like Gina Cass-Gottlieb, for the last twenty years she has been on the defence side, but I believe she too has the necessary public interest commitment essential for the appointment.</p>
<p>It is also timely to appoint a lawyer as chair. </p>
<p>Many years ago, I used to say that lawyers had an unwarranted monopoly on the chairmanship, as they did in the first twenty years of competition law. </p>
<p>These days I would say the opposite: economists should not have a monopoly and where they are appointed, they need to have a strong feel for legal questions.</p>
<h2>Despite what you’ve heard, the ACCC litigated well</h2>
<p>Some claim that the appointments have been made because the ACCC has been poor at litigation, citing evidence of a set of recent losses in merger cases. However, the ACCC’s litigation generally across the whole field of competition and consumer law has been effective and successful. </p>
<p>Its recent losses in merger cases are not essentially the fault of a weak litigation team, but rather reflect the fact that the test for substantial lessening of competition introduced in the 1990s has proved problematic. </p>
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Read more:
<a href="https://theconversation.com/are-mergers-harming-consumers-we-wont-know-if-we-dont-check-115378">Are mergers harming consumers? We won't know if we don't check</a>
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<p>The old pre-1990s test that a merger would only be prohibited if it gave rise to dominance had shortcomings. In particular, mergers that clearly would lessen competition – such as those where the number of major competitors was reduced from three to two – generally were left untouched. </p>
<p>But the test had one advantage: it was easy for courts to apply. It focused on the structure of the market at the time. It was not highly forward looking.</p>
<p>The current prohibition on mergers that are likely to “substantially lessen competition” is right in principle, but asks what the state of competition might be a few years after a merger. </p>
<p>Numerous fanciful stories are presented to the courts about how future competition is a real possibility, with the courts placing too much weight on the self-interested evidence of business applicants.</p>
<h2>Sims put the public interest first</h2>
<p>This problem has been added to by the substantial upskilling of the legal defence establishment compared with times in the 1990s when it was less equipped to deal with new vigorous enforcement of the law.</p>
<p>Claims that the ACCC’s own litigation skills are inadequate pale into insignificance compared with the forces arrayed against them.</p>
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<a href="https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=968&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=968&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=968&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1216&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1216&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437910/original/file-20211215-19-hxc274.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1216&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Rod Sims, ACCC chair since August 2011.</span>
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<p>Outgoing ACCC chair Rod Sims has proposed changes in merger law because of his concerns. One way of fighting off a stronger merger law is to claim it is the regulator’s skills in enforcing the law that are the problem, not the law.</p>
<p>Sims himself has a record of fine achievements across the range of litigation, consumer protection, regulation, market studies and advocacy. </p>
<p>He brought to bear his skills and experience working in government bureaucracy, as a regulator and as a person who spent ten years in the private sector.</p>
<p>He has made a special contribution with his world-first pioneering work on digital platforms, which is being copied around the world. </p>
<p>Sims also had that essential commitment to putting the public interest first, despite enormous pressures from those affected by the application of the law. </p>
<h2>Crytocurrencies, cartels among priorities</h2>
<p>Looking ahead, there are some challenges for the new ACCC chair: above all, continued vigorous and intelligent day-to-day enforcement of competition and consumer law across the board. </p>
<p>Continuing to make progress on the application of the law to the digital platforms will be especially challenging. The economic analysis needed in this area is essentially new and different from that needed in past litigation and regulation.</p>
<p>Big changes are looming in the financial services sector, including the rise of cryptocurrency and new forms of business like those in the buy now and pay later arena. These require careful handling to protect consumers.</p>
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Read more:
<a href="https://theconversation.com/we-allowed-facebook-to-grow-big-by-worrying-about-the-wrong-thing-152190">We allowed Facebook to grow big by worrying about the wrong thing</a>
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<p>Recent changes in the law need careful application. Historically there has been some limitation on the reach of cartel law. In former times, certain business practices that brought about the same results as would an agreed cartel were not covered by the law. </p>
<p>These days if there is a “concerted practice” by business that falls short of an agreement to fix prices – but if it has that effect – it is covered by the new law. This will require careful testing.</p>
<p>I do not agree with the view that the ACCC should not advocate for changes in the law nor comment on competition issues.</p>
<h2>Speaking up will matter</h2>
<p>Without strong ACCC advocacy, most of the good changes in competition law in the past 30 years would not have occurred, including the improved, strong merger law, more sensible provisions about the abuse of market power, criminal sanctions for cartel conduct, unconscionable conduct laws and public support for the Hilmer competition reforms. </p>
<p>In these matters the ACCC has usually started out as a lone voice fighting often loud, hysterical and uninformed opposition from the big end of town, both corporates and lawyers defending their clients.</p>
<p>Many challenges lie ahead for the new chair, but she will find Rod Sims has left the ACCC in excellent shape. We wish her well.</p>
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<p><em>Allan Fels was chair of the ACCC from its inception in 1995 until June 2003.</em></p><img src="https://counter.theconversation.com/content/173736/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Allan Fels was chair of the ACCC from its inception in 1995 until June 2003.</span></em></p>The inaugural chair of the ACCC says Gina Cass-Gottlieb’s experience opposing the ACCC in court will prove invaluable, and that it’s time to appoint a lawyer as chair.Allan Fels, Professorial Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1453652020-09-09T12:19:47Z2020-09-09T12:19:47ZAmericans are renouncing US citizenship in record numbers – but maybe not for the reasons you think<figure><img src="https://images.theconversation.com/files/357055/original/file-20200908-20-1dylgm.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4361%2C2844&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">American citizenship is not as coveted as it once was.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/american-flag-thumbs-down-royalty-free-image/172691591?adppopup=true">iStock / Getty Images Plus</a></span></figcaption></figure><p>President Trump hosted a <a href="https://www.c-span.org/video/?475188-1/president-trump-attends-naturalization-ceremony">televised naturalization ceremony</a> at the White House, aired during the Republication National Convention. </p>
<p>“You’ve earned the most prized, treasured, cherished, and priceless possession anywhere in the world,” he told the five new United States citizens. “It’s called American citizenship.”</p>
<p>Prized? Perhaps. But maybe not priceless. </p>
<p>A record number of Americans are renouncing their citizenship. In just the first half of this year, <a href="https://intltax.typepad.com/intltax_blog/2020/08/2020-second-quarter-published-expatriates-second-highest-quarterly-number-ever.html">5,315 Americans</a> gave up their citizenship. That puts the country on track to see a record-breaking <a href="https://intltax.typepad.com/intltax_blog/2020/08/2020-second-quarter-published-expatriates-second-highest-quarterly-number-ever.html">10,000 people</a> renounce U.S. citizenship in 2020. Until <a href="https://intltax.typepad.com/.a/6a00e54fb13f5188340240a4e5fd87200d-pi">a decade ago</a>, fewer than 1,000 Americans per year, on average, chose to renounce their citizenship. </p>
<p>Why are so many people abandoning the United States?</p>
<h2>The financial factor</h2>
<p>While many liberal Americans <a href="https://www.washingtonpost.com/posteverything/wp/2016/03/02/you-may-think-youll-move-if-trump-wins-but-heres-why-you-wont-really-do-it/">threatened to move abroad</a> after Trump’s election in 2016, rising renunciations are not directly attributable to any particular election result. The trend began in 2013, mid-way through the Obama administration. That year about 3,000 Americans suddenly gave up their passports – three times more than usual.</p>
<p>Nor are people fleeing the U.S. because of the coronavirus. The paperwork for the 5,315 renunciations completed so far this year began long before COVID-19 ravaged the country and made Americans <a href="https://www.cbc.ca/radio/thesundayedition/the-sunday-edition-for-july-19-2020-1.5647948/u-s-citizens-no-longer-have-access-to-most-of-the-world-the-global-south-never-had-it-1.5648022">global pariahs</a>.</p>
<p><iframe id="RUQwY" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/RUQwY/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>In fact, most Americans giving up their U.S. passport already live abroad and hold another citizenship. In <a href="https://www.cnbc.com/2020/07/01/taxes-may-be-top-reason-why-americans-want-to-drop-their-citizenship.html">surveys</a> and <a href="https://www.finance.senate.gov/imo/media/doc/Att%205%20Democrats%20Abroad%202014%20FATCA%20Research%20%20Stories%20of%20FATCA%20-%20Affecting%20Everyday%20Americans%20Every%20Day.pdf">testimonials</a>, these people say they’re dropping their U.S. citizenship because American anti-money laundering and counter-terrorism regulations make it too onerous and expensive to keep. </p>
<p>In 2010, Congress passed the <a href="https://www.greenbacktaxservices.com/blog/fatca-us-expat-taxes-explained/">Foreign Account Tax Compliance Act</a>, which requires foreign financial institutions to report assets held abroad by U.S. citizens and green card holders. The law, intended to identify the non-U.S. assets of all taxpayers, also ended up strengthening a 1970 anti-money laundering law, the <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">Foreign Bank Account Report</a>, which requires citizens to declare all foreign assets to the U.S. Treasury Department.</p>
<p>Together, these two regulations represent a major burden for low-income and middle-income expatriates. Until 2010, they could basically ignore or remain ignorant of the Foreign Bank Account Report because there was little chance the U.S. government would discover their non-compliance.</p>
<p>They weren’t avoiding taxes. Of the roughly 9 million U.S. citizens living abroad, most don’t earn enough to owe Uncle Sam a dollar. Only expatriates who <a href="https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion">make over $107,600 in foreign income are required to pay U.S. taxes</a>. </p>
<p>According to a <a href="https://www.americansabroad.org/files/663/">2018 survey</a> by InterNations, an expatriates’ networking organization, the education sector is the largest employer of Americans living abroad, at 29%. Few educators make six figures. In the U.S., the average teacher earns <a href="https://www.bls.gov/oes/current/oes252021.htm">$60,000</a>. In most other countries, <a href="https://data.oecd.org/teachers/teachers-salaries.htm">it’s even less</a>.</p>
<p>Still, all American expats – even those who’ve lived abroad for <a href="https://www.cambridge-news.co.uk/news/cambridge-news/grandmother-toddler-dollars-usa-14873554">decades</a>, earn no income in the U.S., and hold no U.S. <a href="https://www.thelocal.fr/20200706/frances-accidental-americans-file-new-suit-over-bank-refusals">assets</a> – must submit an annual tax return to the Internal Revenue Service. Now, ever since Congress strengthened anti-money laundering and counter-terrorism financial reporting requirements, many have had to hire <a href="https://www.bbc.com/news/magazine-24135021">costly</a> international accounting firms to do their taxes. </p>
<p>The consequences of noncompliance are <a href="https://www.nationalreview.com/corner/tax-treatment-us-citizens-abroad-absurd-and-unfair-and-getting-worse-veronique-de-rugy/">severe</a>: forfeiting up to <a href="https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar">50%</a> of all undeclared assets held overseas.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A shredded one dollar note on a wooden table" src="https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=495&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=495&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357045/original/file-20200908-16-100q1zi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=495&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">For some, US citizenship has become too annoying to keep.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/shredded-one-dollar-note-on-a-wooden-table-royalty-free-image/76186554?adppopup=true">Halfdark via Getty Images</a></span>
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<h2>Unbecoming American</h2>
<p>“Becoming American” is a <a href="https://www.jstor.org/stable/20092199?seq=1#metadata_info_tab_contents">favorite</a> topic in U.S. literature, popular history, and the <a href="https://www.theatlantic.com/ideas/archive/2020/08/historian-historic-times/615208/">media</a>. There are entire sections of <a href="https://www.amacad.org/publication/what-does-it-mean-be-american">university libraries</a> devoted to books and studies on the topic. My <a href="https://jhupbooks.press.jhu.edu/title/captives-consuls/">first book</a>, about how ordinary American citizens shaped early American national identity, will soon be among them. </p>
<p>However, there is very little written about the reverse: unbecoming American.</p>
<p>Renouncing U.S. citizenship is pretty complicated and costly. It involves one or two interviews with a consular officer, a $2,350 administrative fee – <a href="https://www.movehub.com/blog/dual-citizenship-around-the-world-map/">very expensive</a> compared to <a href="http://isaacbrocksociety.ca/2014/08/22/comparison-of-fees-and-procedures-for-renouncing-citizenship-in-various-countries/comment-page-1/">other wealthy countries</a> – and potential audit of the citizen’s last five years of U.S. tax returns. </p>
<p>The whole process takes about a year. Once you have successfully unbecome American, you need to submit a tax return to the IRS the year after renouncing. After that, your ties to the U.S. government are severed.</p>
<p>The formal, bureaucratic process of unbecoming American resembles the <a href="https://www.uscis.gov/citizenship/learn-about-citizenship/10-steps-to-naturalization">process</a> of becoming American. By the time those five new citizens were naturalized at August’s virtual Republican Convention, they had been U.S. residents for at least five years and spent the past <a href="https://www.wnyc.org/story/citizenship-application-backlog-persists/">12 to 18</a> <a href="https://theconversation.com/us-citizenship-applications-are-backlogged-prolonging-the-wait-for-civil-and-voting-rights-123747">months</a> filing paperwork, scanning their fingerprints, and studying for a civics test.</p>
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<a href="https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Trump stands with five new US citizens, with American flag in the background" src="https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=321&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=321&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=321&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=403&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=403&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357041/original/file-20200908-16-hglmgg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=403&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">A naturalization ceremony aired during the Republican National Convention on Aug. 25, 2020.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/in-this-screenshot-from-the-rncs-livestream-of-the-2020-news-photo/1268603740?adppopup=true">Courtesy of the Committee on Arrangements for the 2020 Republican National Committee via Getty Images</a></span>
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<p>Early in American history, though, citizenship was clumsy, informal, and changeable.</p>
<p>Colonists during the Revolutionary War often switched their allegiance, declaring themselves Patriots or Loyalists, depending on personal circumstances or which army controlled their town at the time, according to historian Donald F. Johnson in his forthcoming book “<a href="https://www.upenn.edu/pennpress/book/16134.html">Occupied America</a>.”</p>
<p>National identity was still in flux after the war. It was often unclear who was actually a citizen. Sailors, in particular, were frequently challenged on their status because many looked and sounded indistinguishable from the British when at sea or in foreign ports, wrote Nathan Perl-Rosenthal in his 2015 book “<a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674286153">Citizen Sailors</a>.” </p>
<p>One of the sailors I researched for my book, James L. Cathcart, regularly changed national allegiances to improve his fortunes. By my count, he switched identities or allegiances eight times by the time he turned 29, in 1796. </p>
<p>Born in Ireland, Cathcart fought for both sides in the American Revolution. Then when captured by Algerian corsairs in 1785, he spent a decade in captivity wavering between calling himself British or American, depending upon which offered the best hope of ransom. During captivity in Algiers he was also made a senior bureaucrat, advising and representing the interests of the ruler of 18th-century Algiers.</p>
<h2>Goodbye, America</h2>
<p>The confusion over identifying American sailors eventually inspired the documentation and bureaucracy that would ultimately be used to determine U.S. citizenship for all.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>As this history shows, the notion of American citizenship as the “most prized, treasured, cherished, and priceless possession” is a relatively recent invention. And it may not be permanent.</p>
<p>With 10,000 U.S. passports expected to be dumped this year and another <a href="https://www.greenbacktaxservices.com/blog/2020-expat-opinion-survey-results/">23%</a> of American expats – about 2 million people – saying they are “seriously considering” renouncing citizenship, unbecoming American is starting to sound as American as apple pie.</p><img src="https://counter.theconversation.com/content/145365/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brett Goodin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some 10,000 people are likely to give up their US passport this year, way above average. Are they fleeing COVID-19? Nasty politics? Taxes? None of the above, says an expert on American citizenship.Brett Goodin, Postdoctoral Fellow, Shanghai campus, New York UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1446882020-08-21T11:46:03Z2020-08-21T11:46:03ZThe PPI scandal is far from over – here’s why<figure><img src="https://images.theconversation.com/files/353877/original/file-20200820-24-1sf9ay2.jpg?ixlib=rb-1.1.0&rect=103%2C236%2C4817%2C2803&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/uk-poundmoney-united-kingdom-close-on-1243360342">Shutterstock/kamui29</a></span></figcaption></figure><p>The PPI scandal led to the largest consumer redress scheme in British history, with over £38 billion paid to claimants <a href="https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation">to date</a>. The deadline for customers to submit their claims was set at midnight on August 29 2019. But, almost one year later, hundreds of thousands of registered claims remain <a href="https://www.which.co.uk/news/2020/03/more-than-half-of-ppi-claimants-still-waiting-for-a-decision/">outstanding</a>. And to make matters worse for the banks, a swathe of new claims have started rolling in.</p>
<p>The Financial Conduct Authority (FCA) hoped the deadline would bring the scandal to an orderly conclusion and offer protection to consumers while helping to restore market integrity. The banks hoped it would enable them to draw a line under it and move on. But the situation seems to be getting worse. </p>
<p>The problem now comes in the form of <a href="https://www.fca.org.uk/publication/finalised-guidance/fg18-02.pdf">unfair commission payments</a>. PPI commission rates were deemed to be unfair for two main reasons: when they were too high or when they were kept secret.</p>
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<p>When they were too high they accounted for, on average, 67% of the PPI price. In the most serious cases they accounted for 95% of the cost of a PPI policy. </p>
<p>When secret, they were (obviously) undisclosed to the customer. That customer – had they been better informed – may have queried the value of their PPI policy. Especially if they had they known that the majority of the price was not going to the product provider (for example, the insurer underwriting the protection cover for the loan or credit card) but to the bank who sold the PPI policy to them.</p>
<h2>Court judgements</h2>
<p>Awareness of the unfair commission payments on PPI policies is not new. But recent <a href="https://pressat.co.uk/releases/court-decides-consumers-who-missed-the-august-2019-deadline-can-still-claim-ppi-451011ea52ba85aefb710630ebede451/">court decisions</a> mean that customers can potentially claw back all of the commission they have paid and claim after the 2019 deadline. </p>
<p>The issue first came to light in the November 2014 Supreme Court case, Plevin v Paragon Personal Finance Ltd, after which the FCA <a href="https://www.fca.org.uk/news/press-releases/fca-finalise-plans-place-deadline-ppi-complaints">changed its guidance</a> on what could be claimed as part of the PPI redress scheme. This change enabled customers to claim commission that accounted for over 50% of the price of the PPI policy and became known as the <a href="https://www.bbc.co.uk/news/business-44696362#:%7E:text=This%20means%20that%20policy%2Dholders,13%20million%20PPI%20pay%2Douts.">Plevin rule</a>.</p>
<p>Payments to customers were however restricted to commission that was in excess of 50%. In other words, successful claimants only received part of the commission that had been paid to the banks. </p>
<p>A series of other court cases saw the position change again, as claimants were awarded the <a href="https://pressat.co.uk/releases/court-decides-consumers-who-missed-the-august-2019-deadline-can-still-claim-ppi-451011ea52ba85aefb710630ebede451/">full commission</a> where the bank failed to disclose large commission payments to the customer. As almost all PPI policies earned high commission rates, this change was significant and opened the floodgates to new claims. </p>
<p>Customers who have received a partial payment, have had their claims rejected or have not claimed so far can now claim, citing the unfair compensation. Even customers who were not mis-sold PPI and were happy with their policy can potentially claim as the high commission payments may not have been disclosed to them.</p>
<p>The potential for new PPI claims based on the unfair commission payments could not have come at a worse time for the banks as they are still facing a backlog of existing claims to process. <a href="https://www.which.co.uk/news/2020/03/more-than-half-of-ppi-claimants-still-waiting-for-a-decision/">A survey</a> conducted in March this year found that 60% of PPI claimants had not heard from their bank about the progress of their claim and half of these had not even received an acknowledgement letter. </p>
<p>Banks were overwhelmed by the volume of claims and although the expected time for banks to respond to such claims is typically eight weeks, the FCA managed this expectation <a href="https://www.fca.org.uk/news/news-stories/ppi-complaints-handling-update">by predicting</a> that most claims would be resolved by summer 2020. </p>
<h2>Coronavirus disruption</h2>
<p>But this deadline was set before COVID-19 disrupted the world and it now appears unlikely to be met. Now many customers remain frustrated that their cases have not been resolved as the new unfair commission charges issue further aggravates and complicates the issue. </p>
<p>The original PPI scandal severely damaged consumer trust in the banks as a lack of integrity was at the heart of the case. PPI mis-selling was something that the banks could have controlled and was an intentional act as the banks placed profits above their customer welfare. </p>
<p><a href="https://eprints.bournemouth.ac.uk/32088/3/QMR_Service_brand_rehab-with_authors%20info_accepted%20version%20%281%29.pdf">My own research</a> has shown that when trust is damaged by a lack of integrity, it is difficult to restore. The banks needed to display clear evidence of an intention to get rid of negative influences. </p>
<p>For a start, all banks should have immediately apologised for the mis-selling. Some did, but this was only after <a href="https://www.choose.co.uk/news/banks-apologise-over-ppi-rip-off.html">they lost</a> a high court case trying to overturn the FCAs ruling on PPI mis-selling. The banks really needed to signal to employees the importance of a customer-centered culture and change employee incentive systems to align with long-term performance, rather than short-term profit. </p>
<p>Banks need to embed ethical values into their routine actions and decisions. So far, <a href="https://www.ft.com/content/2abb8482-c9b3-11e9-a1f4-3669401ba76f">the evidence</a> is that not all banks have bothered to take such steps.</p><img src="https://counter.theconversation.com/content/144688/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Robson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks hoped last year’s PPI deadline would draw a line under the scandal - but the claims keep coming.Julie Robson, Associate Professor Marketing, Bournemouth UniversityLicensed as Creative Commons – attribution, no derivatives.