Douglas Arner et al on Systemic Banking Crises and Designing Appropriate Systems of Public Support (European Business Organization L Rev)

"COVID-19, Macroeconomic and Sustainability Shocks, Moral Hazard and Resolution of Systemic Banking Crises: Designing Appropriate Systems of Public Support"

Douglas W. Arner, Emilios Avgouleas and Evan C. Gibson
European Business Organization Law Review
Published in 2022

Abstract: Banks have so far weathered well the financial turbulence caused by COVID-19 while at the same time being central in the economic and financial response. As the crisis moves from its initial phase as a short-term liquidity shock, the financial sector is facing increasing volumes of non-performing loans, raising the spectre of a banking solvency crisis. In economies already burdened with low-quality assets, the COVID-19 fallout is intensifying existing problems with legacy loans heightening the risk of a banking crisis. These issues are now being worsened by the impact of inflation and the invasion of Ukraine. Thus, addressing increasing volumes of bad loans, while supporting the proper functioning of the financial system, is a major challenge with systemic repercussions for a range of economies. This paper identifies a great paradox: since the bank rescues of the 2008–9 Global Financial Crisis there has been a disproportionate focus on the liability side of bank balance sheets through resolution measures such as bail-in and the accumulation of bail-inable debt. Post-crisis bank resolution regimes have overlooked solutions lying within the asset side of bank balance sheets. This paper analyses historical evidence to argue that concentrating on a liability-focused approach to the exclusion of asset-side solutions is ill-conceived. An excessive accumulation of non-performing loans on the asset side of bank balance sheets inevitably renders resolution interventions on the liability/equity side ineffective or at the very least insufficient to maintain banking system viability and financial stability. Bank asset restructuring involving the use of asset management companies, asset protection schemes and even capital injections can play a critical role in achieving an expeditious restoration of banking systems’ health following a major macroeconomic, sustainability or financial crisis.

Emily Lee on Financial Inclusion and Bank Account Opening in Hong Kong (HK Lawyer)

"Financial Inclusion and Bank Account Opening in Hong Kong"

Emily Lee

Hong Kong Lawyer

10 July 2020

Abstract: Financial inclusion denotes banks’ provision of basic financial services at affordable costs to those that need and qualify for them. The opposite is financial exclusion, which is when banks deny financial services to customers that they consider as posing high risks for money laundering and terrorist financing, giving rise to the term “de-risking” or “de-banking”. A litany of financial exclusion reports impelled the Hong Kong Money Authority (HKMA) to issue a circular to banks warning against their practices of de-risking on 8 September 2016. Since then, financial inclusion has become a topic of public interests. The article contains nuanced analyses on the “Bank Account Opening Survey”, first published by the Hong Kong Institute of Chartered Secretaries (HKICS) in September 2016. Thereafter, the HKMA established a dedicated webpage on the topic of bank account opening. The HKICS also conducted a second survey on bank account opening that was published in July 2018. As a result, comments on the HKICS’ bank account opening surveys will consist of two separate parts, as provided below, which are intended to complement each other.  Click here to read the full article.

Douglas Arner Interviewed on How Central Banks Can Capitalise on Regtech (Central Banking)

"Capitalising on regtech"
Joel Clark
Central Banking
30 July 2018

If one were to imagine the ideal financial supervision system of the future, it would probably look very different from what we have today. Financial institutions would report details of transactions to a central utility, from which regulators would be able to extract information in real time. They might monitor markets through multiple screens in futuristic control rooms, picking up systemic risks with the help of flashing lights and heat maps.

     Data reporting requirements have increased dramatically since the 2007–2008 financial crisis, but central banks and regulators admit they cannot yet use this data to build an accurate picture of risk in the financial system. The evolution of regulatory technology, or regtech, might help deal with this problem – and some central banks are actively exploring opportunities – but there is a long way to go.

...

   “New regulations over the past decade have created a massive new pool of data that didn’t previously exist, so there is a major opportunity for central banks to use this data to obtain better insights and achieve better regulatory outcomes,” says Douglas Arner, professor of law at the University of Hong Kong.

     Enthusiasm for exploring regtech varies across the central bank community, with some institutions already surveying and testing new approaches while others wait to see how the technology evolves. But the data challenge shows little sign of diminishing, with the likelihood of further reporting requirements being layered on top of existing ones... Click here to read the full article.

Lessons from Two Decades of Banking Crises (new paper by Arner, Avgouleas & Gibson)

"Overstating Moral Hazard: Lessons from Two Decades of Banking Crises"
Douglas Arner, Emilios Avgouleas and Evan Gibson (PhD 2015)
University of Hong Kong Faculty of Law Research Paper No 2017/003
March 2017, 76 pp

Abstract: Over the past two decades a variety of banking system rescue approaches have been used, including in the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2010 European debt crisis. By analysing the resolution of these crises as well as the approach to addressing bad loans in the People’s Republic of China, this paper provides a new perspective on the common belief that bailouts are invariably harmful to public funds or excessively conducive to moral hazard. Depending on the form of bailout, bank restructuring, and fiscal backstop, resolutions can be an effective means to restore a banking system. This paper argues that in a systemic financial crisis, a combination of balance sheet restructuring and the use of asset management companies to deal with non-performing loans is often the best choice. However, a fully-fledged resolution that triggers the bail-in procedure remains the best approach for non-systemically important financial institution failures which take place outside of systemic crises, namely when the failure is idiosyncratic.  Click here to download the full paper.

Emily Lee on China's Shadow Banking System after the Global Financial Crisis (PekingULJ)

"Shadow Banking System in China after the Global Financial Crisis"
Emily Lee
Peking University Law Journal
March 2016, Vol. 3, Issue 2, pp 362-384

Abstract: This article first examines the composition of the shadow banking system in China and then critically analyses its interconnectivity with the traditional banking system and global capital markets. It argues that whilst shadow bank lending in China contributes to the country's economic growth, the normal functionality of capital markets could be impaired if shadow banks continue to operate on a high-risk/high-yield business model which could potentially pose a systemic risk. It also addresses the concerns arising from high-leverage shadow bank lending practice and cautions against shadow banks operating in a black hole area that enables them to escape from regulatory purview. The article suggests that future regulatory (law) reform should guide shadow banks towards consumer protection by establishing an effective internal control system, enabling sufficient risk controls and requiring material information disclosure; towards safeguarding capital markets; and towards reducing their high levels of leverage. Contact the author for a copy.

Douglas Arner Interviewed on HSBC's London HQ Decision (Dow Jones)

"Hong Kong Looks for Answers After HSBC Opts to Stay in London"

Julie Steinberg
Dow Jones Business News
15 February 2016

HSBC Holdings PLC's decision to keep its headquarters in the U.K. rather than move to Hong Kong is prompting soul-searching in this former British colony about its perception on the world stage.

     The decision comes as Hong Kong's growing ties to the volatile mainland markets are sparking concern among investors, who are fearful of outsize interference from Chinese authorities. Bankers in the city are also growing more concerned about their personal liberties after several booksellers disappeared and reappeared in mainland China.

...

     Other observers say HSBC's headquarters decision has no bearing on Hong Kong's appeal as a financial hub.

     "I don't really see this as a comment" on Hong Kong's position as an international financial center, "nor on political stability," said Douglas Arner, a professor at the University of Hong Kong specializing in economic and financial law and regulation.

     "Each case is very specific and [Hong Kong] continues to be highly attractive as a location for regional and international headquarters and operations for international financial institutions of all forms," said Mr. Arner, who is also a member of the city's Financial Services Development Council, which advises the government on expanding the financial services industry... Click here to read the full article.

HKU Class of 2015 Graduates (Law PhD, SJD and MPhil)

Congratulations to our 7 PhD, 4 SJD and 1 MPhil graduates who will have their degrees conferred upon them at the 194th Congregation on 3 December 2015 at the University of Hong Kong. The newest members of our RPG alumnae family include the following:

1. Dr. Man Ho AU (PhD). Rethinking access regulation from the transaction cost economics perspectives : a comparative analysis of the legal and policy developments for first and next generation access networks in the US, the UK, Australia and Hong Kong.  Supervisor: Richard Wu.  Examiners: Mark Williams (University of Melbourne), Kevin Pun (HKU), Felix Chan (HKU).

2. Dr. Shan CHI (PhD).  Chinese inventiveness criteria and their impacts on industry : inspiration from bio-patents.  Supervisor: Yahong Li.  Examiners: Benjamin Liu (John Marshall Law School), Yun Zhao (HKU), Haochen Sun (HKU).

3. Dr. Li GAO (PhD).  Promoting the development of green technology in China : using patent law as an environmental instrument.  Supervisors: Yahong Li and Jolene Lin.  Examiners: Bryan Mercurio (CUHK), Michael Ng (HKU), Shahla Ali (HKU).

4.  Dr. Evan Corby GIBSON (PhD).  Managing financial stability and liquidity risks in Hong Kong's banking system : what is the optimum supervisory model?  Supervisors: Douglas Arner and Lee Aitken.  Examiners: Michael Taylor (Moody's), Berry Hsu (HKU), Emily Lee (HKU).

5. Dr. Peng HAN (PhD).  An analysis of the changing nature of law and social solidarity in contemporary China : the application of Durkheim's theory of solidarity to Chinese society. Supervisor: Scott Veitch.  Examiners: Zheng Ge (Shanghai Jiaotong), Albert Chen (HKU), Hualing Fu (HKU).

6.  Dr. Jieying LIANG (PhD).  Party autonomy in contractual conflict of laws: a Chinese perspective on the adjudication of the enforceability of choice of law clauses.  Supervisor: Michael Tilbury.  Examiners: Brian Opeskin (Macquarie), Anselmo Reyes (HKU), Xianchu Zhang (HKU).

7.  Dr. Herman Yung Sing TO (PhD).  Microfinance in China - the postal bank and credit cooperatives as key players.  Supervisor: Douglas Arner.  Examiners: Zhou Zhongfei (Shanghai University of Political Science and Law), Say Goo (HKU), Xianchu Zhang (HKU).

8.  Dr. Ida Kwan Lun MAK (SJD).  Institutionalizing the effective use of ADR for the resolution of shareholder disputes in Hong Kong.  Supervisors: Katherine Lynch and Shahla Ali.  Examiners: Kun Fan (CUHK), Yun Zhao (HKU), Anna Koo (HKU).

9.  Dr. Xiao PAN (SJD).  Private non-enterprise institutions in China in an era of charity law reform.  Supervisor: Say Goo.  Examiners: Wei Shen (Shanghai Jiaotong), Douglas Arner (HKU), Hualing Fu (HKU).

10.  Dr. Xue PENG (SJD).  Corporate governance of Chinese privately owned enterprises listed in Hong Kong : an empirical study of three levels of agency problems.  Supervisor: Douglas Arner.  Examiners: David Donald (CUHK), Say Goo (HKU), Xianchu Zhang (HKU).

11.  Dr. Zhongyi TAO (SJD).  Fair use regime in China : findings from an exploration into judicial experiences.   Supervisors: Yahong Li and Po Jen Yap.  Examiners: Irene Calboli (Marquette), Hualing Fu (HKU), Alice Lee (HKU)

12.  Ms Yuchen SONG (MPhil).  Exploring derivative action in Japan and China.  Supervisor: Guanghua Yu.  Examiners: Hui Huang (CUHK), Douglas Arner (HKU).

New Issue: SSRN Legal Studies Research Paper Series (HKU)

Vol. 5, No. 7: 25 August 2015

Table of Contents

1. The Basic Law, Universal Suffrage and the Rule of Law in Hong Kong

Michael C. Davis, The University of Hong Kong - Faculty of Law

2. Shadow Banking System in China after the Global Financial Crisis: Why Shadow Banks Can Distort the Capital Market Order

Emily Lee, The University of Hong Kong - Faculty of Law

3. Professional Legal Education Reviews: Too Many 'What's', Too Few 'How's'

Wilson Chow, The University of Hong Kong - Faculty of Law

Firew Kebede Tiba, Lecturer in Law, Deakin University School of Law, Melbourne, Australia

Susan Finder on Private Lending and Shadow Banking in China

"Private Lending in China: Out of the Shadows?"
Susan Finder (Visiting Fellow, Centre for Chinese Law)
The Diplomat
12 August 2015

As I wrote in June, the Chinese courts are flooded with private (or “shadow”) lending cases, involving increasingly large amounts of money. The law on shadow lending is particularly unclear and fluid, causing uncertainty for debtors, lenders, and judges. Government recognition of internet lending and P2P lending, now at an early stage, means that many more shadow lending disputes are destined for the already stressed court system.

     On August 6 the Supreme People’s Court (SPC) issued what it calls a “judicial interpretation” to set out basic rules for private lending. This private lending judicial interpretation, which will become effective on September 1, applies to P2P internet platforms but not internet platforms operated by entities regulated by financial regulators.

     When announcing the private lending judicial interpretation, the SPC released updated statistics on private lending. Private lending disputes are the second most numerous type of civil case in the Chinese courts, with 526,000 cases in the first six months of this year, up 26 percent in comparison to the same period in 2014. The flood of cases has put enormous pressure on the court, and uncertainty concerning the legal structure has affected all parties, from small and medium enterprises to judges and lawyers... Click here to read the full article.

New Scholarship on Shadow Banking

"The Shadow Banking System - Why it Will Hamper the Effectiveness of Basel III"
Emily Lee
Journal of International Banking Law and Regulation
Vol. 12, July 2015 (forthcoming)

Abstract: This article examines why regulatory arbitrage and the interconnectivity between the traditional banking and shadow banking systems amplified the pro-cyclicality during the global financial crisis of 2007-2009; and discusses why the regulatory focus should turn to reducing the interconnectedness of the two systems in order to prevent systemic risk to the global financial system. This article also predicts that Basel III’s heightened capital requirements will have a limited impact on curbing shadow banking activities and may inadvertently push traditional banks to rely even more on shadow banking in order to sustain their financial position or to generate greater revenue.  Click here to download the article.

"Shadow Banking Cases Threaten to Overwhelm China's Courts"

Susan Finder (Fellow, Centre for Chinese Law)

The Diplomat

5 June 2015

Many bankers and economists have been looking at shadow banking in China. But what happens when debtors fail to pay their debts or challenge the lending arrangements? When parties to shadow lending end up in dispute resolution, it raises unique issues for the institutions that hear those cases.

     What few outside of China have noticed is that shadow lending disputes account for an increasingly large proportion of civil cases in the Chinese courts and involve increasingly large amounts of money. The law on shadow lending is particularly unclear and fluid, causing uncertainty for debtors, lenders, and judges.

     Government recognition of internet lending and peer-to-peer (P2P) lending, now at an early stage, likely means that many more shadow lending disputes are destined for the already stressed court system...  Click here to read the full article.

New Issue: SSRN Legal Studies Research Paper Series (HKU)

Vol. 5, No. 3, 24 April 2015

1. Attribution and the Fraud Exception

Ernest Lim, University of Hong Kong - Faculty of Law

2. Independence Referendum, State Sovereignty and International Law: International Legal Review of Independence Referendum from the Perspective of Theoretical Foundation and Global Practice

Anlei Zuo, The University of Hong Kong, Faculty of Law, Students

3. Can International Law Help Resolve the Conflicts Over Uninhabited Islands in the East China Sea?

Michael C. Davis, The University of Hong Kong - Faculty of Law

4. The Shadow Banking System — Why It Will Hamper the Effectiveness of Basel III

Emily Lee, The University of Hong Kong - Faculty of Law

5. Comparing Hong Kong and Chinese Insolvency Laws and Their Cross-Border Complexities

Emily Lee, The University of Hong Kong - Faculty of Law

New Publication on UK Directors' Disqualification Regime

"Directors' duties and liabilities: Disqualifying ‘unfit’ directors at banks? Political rhetoric and the directors’ disqualification regime"
John Lowry and Rod Edmunds

in Iris H-Y Chiu (ed), The Law on Corporate Governance in Banks

Edward Elgar, 2015, pp 75-98

Abstract: The purpose of the chapter is to assess the general scope of the UK’s directors’ disqualification regime, particularly section 8 of the Company Directors Disqualification Act 1986 which provides for the disqualification of ‘unfit’ directors. The shortcomings of the regime are assessed together with the current proposals for its reform which are prompted by the desire to facilitate the disqualification of errant senior bankers such as those who captured the attention of the media and, therefore, the wider public. The most prominent amongst these are HBOS’s Andy Hornby, Sir James Crosby and Lord Stevenson, together with the former CEO of the Royal Bank of Scotland (RBS), Fred Goodwin. The chapter first considers the particular circumstances which led to the taxpayers’ bailout of the RBS and HBOS. The focus here is on the culpability of the senior executives of both institutions rather than upon the other contributing factors, such as the shortcomings of the regulatory regime, which led to the failure of the banks. The aim is to show that in the light of what happened in RBS and HBOS, the current timidity over the initiation of disqualification proceedings under section 8, seemingly prompted, as will be seen, by misgivings over whether there is sufficient evidence against the directors to at least establish a prima facie case, may be far too pessimistic. Second, it assesses the jurisprudence surrounding disqualification on the ground of ‘unfitness’. It will show that the substantive terms of this basis for disqualification contains ample scope to address the conduct of senior executives at HBOS and RBS, not least because the courts have refused to strait-jacket the test of unfitness with rigid categorisations. It concludes by considering recent political initiatives aimed at providing alternative routes for holding senior bankers liable for reckless behaviour.  Professor Lowry is Chair of Commercial Law.