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Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance



Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance

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Experts from NYU Stern School of Business analyze new financial regulations and what they mean for the economy

The NYU Stern School of Business is one of the top business schools in the world thanks to the leading academics, researchers, and provocative thinkers who call it home. In Regulating Wall Street: The New Architecture of Global Finance, an impressive group of the Stern school’s top authorities on finance combine their expertise in capital markets, risk management, banking, and derivatives to assess the strengths and weaknesses of new regulations in response to the recent global financial crisis.

  • Summarizes key issues that regulatory reform should address
  • Evaluates the key components of regulatory reform
  • Provides analysis of how the reforms will affect financial firms and markets, as well as the real economy

The U.S. Congress is on track to complete the most significant changes in financial regulation since the 1930s. Regulating Wall Street: The New Architecture of Global Finance discusses the impact these news laws will have on the U.S. and global financial architecture.

Foreword xi

Preface xvii

Prologue: A Bird’s-Eye View

The Dodd-Frank Wall Street Reform and Consumer Protection Act 1
Viral V. Acharya, Thomas Cooley, Matthew Richardson, Richard Sylla, and Ingo Walter

PART ONE Financial Architecture 33

Chapter 1 The Architecture of Financial Regulation 35 Thomas Cooley and Ingo Walter

Chapter 2 The Power of Central Banks and the Futureof the Federal Reserve System 51
Thomas Cooley, Kermit Schoenholtz, George David Smith, Richard Sylla, and Paul Wachtel

Chapter 3 Consumer Finance Protection 73
Thomas Cooley, Xavier Gabaix, Samuel Lee, Thomas Mertens, Vicki Morwitz, Shelle Santana, Anjolein Schmeits, Stijn Van Nieuwerburgh, and Robert Whitelaw

PART TWO Systemic Risk 85

Chapter 4 Measuring Systemic Risk 87
Viral V. Acharya, Christian Brownlees, Robert Engle,Farhang Farazmand, and Matthew Richardson

Chapter 5 Taxing Systemic Risk 121
Viral V. Acharya, Lasse Pedersen, Thomas Philippon,and Matthew Richardson

Chapter 6 Capital, Contingent Capital, and Liquidity Requirements 143
Viral V. Acharya, Nirupama Kulkarni, and Matthew Richardson

Chapter 7 Large Banks and the Volcker Rule 181
Matthew Richardson, Roy C. Smith, and Ingo Walter

Chapter 8 Resolution Authority 213
Viral V. Acharya, Barry Adler, Matthew Richardson,and Nouriel Roubini

Chapter 9 Systemic Risk and the Regulation of Insurance Companies 241
Viral V. Acharya, John Biggs, Hanh Le, Matthew Richardson, and Stephen Ryan

PART THREE Shadow Banking 303

Chapter 10 Money Market Funds: How to Avoid Breaking the Buck 305
Marcin Kacperczyk and Philipp Schnabl

Chapter 11 The Repurchase Agreement (Repo) Market 319
Viral V. Acharya and T. Sabri O¨ ncu¨

Chapter 12 Hedge Funds, Mutual Funds, and ETFs 351
Stephen Brown, Anthony Lynch, and Antti Petajisto

Chapter 13 Regulating OTC Derivatives 367
Viral V. Acharya, Or Shachar, and Marti Subrahmanyam

PART FOUR Credit Markets 427

Chapter 14 The Government-Sponsored Enterprises 429
Viral V. Acharya, T. Sabri O¨ ncu¨ , Matthew Richardson, Stijn Van Nieuwerburgh, and Lawrence J. White

Chapter 15 Regulation of Rating Agencies 443
Edward I. Altman, T. Sabri O¨ ncu¨ , Matthew Richardson, Anjolein Schmeits, and Lawrence J. White

Chapter 16 Securitization Reform 469
Matthew Richardson, Joshua Ronen, and Marti Subrahmanyam

PART FIVE Corporate Control 491

Chapter 17 Reforming Compensation and Corporate Governance 493
Jennifer Carpenter, Thomas Cooley, and Ingo Walter

Chapter 18 Accounting and Financial Reform 511
Joshua Ronen and Stephen Ryan

Epilogue 527

About the Authors 531

About the Blog 535

Index 537


"A fascinating, lively, and thoroughly readable guide to the Dodd-Frank Act that pierces the cloud of confusion that hangs over so much of the financial reform debate. It is extremely timely and valuable, and should be required reading for all policymakers, investors, and students of finance. What makes the book so valuable is that it not only analyzes the scope of the Act, in a punchy, lively style, but it also discusses its potential impact. More important, the book analyzes what is not covered in the Act—and where the potential challenges to the financial system still lie."
Gillian Tett, U.S. Managing Editor, Financial Times

"The crisis of 2008 confronted even well-educated Americans with a flood of incomprehensible financial vocabulary, describing novel financial institutions and practices most of us had never heard of before. Now we have the 2,300-page Dodd-Frank Act, designed to provide the needed repair. Will it do so? What else will it do? How can we even start to think about these basic questions? Regulating Wall Street addresses these questions in a clear, direct style, taking us through the many parts of the Act one at a time, and providing informed, cogent economic analysis of each. A valuable standard source for future discussion."
Robert E. Lucas, University of Chicago, 1995 Nobel Laureate

"Take the faculty of one of the best finance departments in the world. Ask them to analyze the new U.S. legislation on financial regulation, and to think about what the new law gets right, what it gets wrong, and how it is likely to shape the future of the financial system. With a bit of luck, you get this very impressive book. An absolute must-read."
Olivier Blanchard, Chief Economist, International Monetary Fund

"Regulating Wall Street goes a long way toward clarifying the intent of the various provisions of the Dodd-Frank Act and evaluating both its effectiveness and limitations. The need for effective implementation by agencies is appropriately emphasized. Not a quick read, a useful reference work on an enormously complex piece of legislation, dealing with an even more complex financial reality."
Paul Volcker, Chairman of the Economic Recovery Advisory Board and former Chairman of the Federal Reserve (1979–1987)

“There are many villains in the story of the recent crisis and much written to name them, describe them and even curse them. . .  If you want to know how to fix the problem, I highly recommend ‘Regulating Wall Street,’ from New York University’s Stern School of Business. . .  In the excellent book, ‘Regulating Wall Street,’ several of the studies indicate that there are few synergies among financial activities that could lead to economies of scope. The studies also demonstrate that multiple functions in large, complex firms can actually increase systemic risk. Moreover, they suggest that the spun-off activities could thrive without explicit or implied government support.  The conclusion in this book is that separating activities in this manner, together with stronger resolution processes and better capital standards, would do much to strengthen our financial system, making it more accountable and stronger.”
Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City

"Readers should read Regulating Wall Street to understand why, in the face of market failures and copious evidence that Wall Street is unproductive, Congress and regulators labored mightily to resurrect the financial intermediation racket just as it existed on September 12, 2008." (Tax Notes)

“If you want to know how to fix the problem, I highly recommend Regulating Wall Street, from New York University’s Stern School of Business.”
Karl Denninger, Seeking Alpha

“One refreshing sign of hope for constructive change is that economists, some of whose theories had much to do with a light regulatory approach toward derivatives and the housing bubble, are increasingly producing research calling for stricter guidelines then Dodd-Frank or the Obama administration. Regulating Wall Street presents a wide range of new research supporting stronger regulations than Dodd-Frank recommends, such as . . . tax proposals. . . In the prologue of Regulating Wall Street, the editors, hardly known as progressives, remind financiers how useful strong regulations were in the past. . . We would be better off if the powers on Wall Street would remember. . . “
(New York Review)