June 16, 2011
Banking Roundtable: Teaching Systemic Risk Regulation
Posted by Erik Gerding

The following post comes to us from Heidi Mandanis Schooner, Professor of Law at the Columbus School of Law of the Catholic University of America.

Teaching Banking Law has always been about systemic risk. Post-Financial Crisis, we see that the microprudential approach to systemic risk was too narrow (i.e., it only focused on deposit-taking banks and too much on their solvency). Yet, the regulatory goal remains the same. In other words, protecting the solvency of a bank (microprudential) was never meant to be about protecting that individual firm. It was about protecting that firm because of the systemic implications if you didn’t. The Financial Crisis highlighted the need to broaden the scope of prudential regulation – and we gave it a new and improved name – macroprudential regulation.

In almost every class, I use variations on two visuals that I find useful in teaching the course. The first is the balance sheet which I use throughout the course to help students understand the nature of the business of banking and the fragility of banks. The second visual (the focus of this post) is a series of organizational charts. Focus on the structure of the organization emphasizes the traditional and persistent institutional focus of prudential regulation. Some examples of various charts are below but, obviously, there are many variations on this theme. The progression below is also roughly chronological in terms of the passage of bank legislation and therefore can be used in developing the history of regulation. Moreover, the statutes themselves are a challenge for students. The institutional focus assists in separating, for example, the National Bank Act from the Bank Holding Company Act, etc.

National Bank. Most traditional prudential rules apply strictly to that entity, i.e., special chartering, lending limits, business of banking (§ 24(seventh)), etc. Other types of prudential rules can also be introduced at this level and circled back to later, e.g., Section 16 of Glass Steagall, capital regulation, administrative enforcement, special insolvency rules. 

Nat'l Bank pic 

Bank Holding Company.  Coverage at the bank holding company level can include 23A and B, geographic limits, activities restrictions (e.g., commerce, Volcker rule).  This type of organization chart is also useful in illustrating the responsibilities of the various bank regulators.

Financial Holding Company.  Coverage of the financial holding company relates to Gramm Leach Bliley – securities, insurance and merchant banking activities.


Systemically Important Financial Institutions.  This will include large bank holding companies and, most importantly, non-bank financial institutions.  The visuals here will be less about adding onto an organizational chart and more about identifying firms that are deemed systemic.    Naturally, this is the place in which Dodd-Frank will have the greatest impact on the course.  Coverage will include: identification of systemic non-bank institutions, enhanced prudential rules, countercyclical rules, living wills, and the new resolution regime.


International Law.  Although Banking Law is a domestic course, I try to introduce as much international and comparative law as possible.  In teaching capital, for example, I find that the Basel rules are more accessible to students than U.S. capital regulations.  I also try to introduce some comparative perspective as time permits.

Topics Not Covered.  If one conceives of the course as macroprudential, then consumer protection issues can be omitted.  This does not solve the question of how to deal with market regulation that aims to address systemic risk (e.g., OTC derivatives).  I am inclined to conclude that a full treatment of market regulation should be left to securities courses.  At very least, some coverage of market regulation in the banking law course is appropriate to emphasize the fact that a purely institutional focus to systemic risk regulation is incomplete.  

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