This post comes to us from Lawrence Baxter  (Duke University School of Law) as part of our Roundtable on Teaching Banking Law/Financial Institutions.  You can read the other posts  in the roundtable here.

Thank you, Erik, for setting up this fascinating and very helpful forum. I apologize for coming late to the conversation, situated as I now am in chilly but exuberant and splendid South Africa after languishing for a week in beautiful Croatia. I have had the benefit of being able to read the inspiring contributions to the forum; as a result, I am inspired to revise completely the order of my assigned readings before classes begin—in only four short weeks!

I should note that I come to the teaching of bank regulation with a particular set of biases. In the first place, having spent some of my earlier years consulting with the federal banking agencies and working with the staff of the Senate Banking Committee during passage of FDICIA, I am keenly aware of the importance of understanding the law within the larger framework of financial policy. Secondly, my time working with a financial institution was entirely on the strategic and business side, not within the office of general counsel. So I tend to think of legal practice as serving the long term strategic prosperity of the business, which long term prosperity necessarily involves stability and the addition of value for sharehoders and the communities in which they operate. This is not to say that I believe the role of lawyers is simply to serve the immediate ends of the businesses that are their clients; on the contrary, I take the view that some among the legal profession, whether external or in-house counsel, sometimes submit far too greatly to the will of business executives without asserting independent leadership where the long term interests of the financial institution and its shareholders and customers really demand this independence. Financial lawyers have sometimes allowed themselves to become too much of a service industry and appear to have abandoned their roles as a source of wise counsel.

So my approach is to try to inculcate in students an understanding of the whys more than the whats. My hope is that this will encourage students not only to think strategically but also to recognize and understand both public and long-term private interests. This asks a lot of such future lawyers because impatient executives are seldom willing to listen to a sermon on the virtues of constraints they are trying to avoid. But if we don’t persevere in this effort then attorneys might as well consign themselves to roles not significantly different from those of marketers and human resource personnel.

I teach domestic and international banking regulation in separate courses—the former in the fall and the latter in the spring. During the past academic year I used a diverse collection of material for the domestic course and the superb Schooner/Taylor book plus additional material for the international course. Before I left on my current trip I had worked out the syllabus and reading assignments for the fall 2011 domestic course, almost all of which are based on Lissa Broome’s and Jerry Markham’s new casebook edition.

I never felt comfortable with this approach for two main reasons. First, it is now entirely artificial to separate domestic and international bank regulation, so a good deal of the international course has to find its way into the domestic course anyway. How can one possibly teach domestic regulation without recognizing that the operations of large banks are transnational and, in most cases, global? And, of course, Basel is integral to domestic bank regulation, while the actions and recommendations of the Financial Stability Board, G20 and other international institutions have a great impact, whether acknowledged or not, on the shape of domestic regulation, be it through rules or agency decisions. The Collins Amendment provides one of many illustrations.

Second, although Lissa and Jerry performed a Herculean task in updating their excellent casebook so soon after the passage of Dodd-Frank, I have become increasingly disenchanted with the casebook method as a means of teaching financial regulation, particularly now that the field has become so dynamic when compared to how it was twenty years ago. Of course there are key historical cases (e.g., McCulloch v. Maryland, Tiffany National Bank), and well-crafted judicial opinions, albeit rather scarce, help students to understand essential principles and the way these are applied in formal disputes. Cases such as the Second Circuit’s § 20 decisions form part of the dynamic tableau of financial regulation and they help to illustrate the interaction of public policy, agency positioning, industry advocacy that produces important though evanescent inflection points. But forcing the class to understand the larger picture through the episodic vignettes and procedural contortions of cases that make their way to the federal circuits and Supreme Court seems to me to distort the overall picture in ways that are not ideal when one is trying to lay down a long-lasting framework for future counsel. It is true that future financial lawyers are going to need to know the law with great precision once they engage in practice, but they are never going to acquire such precision within the framework of a three-hour course of passing technical validity. My hope is that the learning in law school that lasts is the bigger picture that frames the continually changing detail.

Perhaps it is also true that the case method, if used too much beyond the first year (where one is teaching basic forensic skills), wrongly encourages young lawyers to the assumption that the most important service they can provide is to defend their clients’ positions at almost all costs. This teaching method might even have contributed to the more general malaise in regulatory Washington, where no sensible result can be reached because adversary gridlock is perpetually generated or encouraged by lawyers terrified of conceding ground on behalf of their clients.

The previous conversations in this blog, in which others have described such imaginative use of diverse material in a fluid environment, leaves my earlier planned approach seeming not only uncomfortable, for the reasons already outlined, but also rather pedestrian. So although the die is cast for course listings for the 2011-12 academic year and my messy domestic/international bifurcation between must continue for the time being, I am nevertheless going to impose my own framework on the class reading sequence for the casebook. Instead of following the general order of the casebook, in making the reassignments of the readings from Broome & Markham I now plan to lay out my syllabus along the outline below (readers will recognize in my terminology my fascination with complexity theory as it applies to financial regulation):

I. The Financial Regulatory Ecology

• Financial systems, agents and stability
  • Incl. brief overview of industry structure and demographics
• Central banking and regulatory supervision
  • Agency structure overview
  • Incl. some comparatives
• Exchanges and FMUs
• Regulatory forms, market failure and regulatory failure
• Why banks are (still) special and often Too Big to Fail

II. Path Dependencies

Like others in this forum, I cannot conceive teaching financial regulation without helping students to gain a basic understanding of how our regulatory framework evolved, what happened at various key moments in US and international economic history, and why legislation such as Dodd-Frank ends up being as complex and convoluted as it is. This history provides crucial elements of the initial states from which our regulatory thickets sprung, and how the financial industry has formed. Besides, the history is one of the most entertaining elements for students and a way to help them integrate their knowledge from other courses, such as constitutional and administrative law, into their understanding of financial regulation in general and banking regulation in particular.

III. “Banking” in its Modern Forms

• “Business of banking,” “incidental business,” and “closely related” financial services
• Balance sheet structure and P&L dynamics
  • Basic overview of capital/liability/asset structure
• How banks earn (and lose) money
  • Liquidity and funding management and risks
  • Incl. securitization, derivatives, etc.
  • Accounting and tax trickery
• How other financial segments fit in
  • Investment banking
  • Insurance
  • Public and private funds
  • “Shadow banking”
  • Rating agencies
  • Competition, Scale and Universal banking
• The conflicting ethics and cultures of modern finance

IV. Risk

• Fractional reserve banking
• Leverage
• Losses
• Risk management
• Capital, risk-adjustment, Collins, etc.
• Basel

V. Structure

• Traditional “walls:” Glass-Steagall, McFadden, BHC Act, McCarran-Ferguson
• M&A & competition
• Affiliation & Anti-tying
• GLB & “Deregulation”
• Dodd-Frank, esp. Volker Rule(s): the attempt to separate, once again, custodial banking from investment banking
• Size and TBTF redux

VI. Conduct

(Note: Here I lean in the direction of Adam Feibelman rather than Heidi Schooner. But I would go further: not only are consumer protection issues, presented a certain way, of macroprudential importance; they are also directly relevant to the supervision of individual institutions for safety and soundness (i.e. as a microprudential consideration). As an illustration, my own company (after I retired from it, I hasten to add!) entered the realm of adjustable ARMs when it purchased Golden West. This step eventually destroyed the company. I believe the regulators and shareholders should be asking penetrating questions about why financial institutions are making patently stupid, or at the very least imprudent, loans and why such activity will not impact the solvency of the institution. Regulators should be demanding proof that mortgage service outsourcing, for example, has been done responsibly and in a manner that can withstand a crisis like the one we are in. The debate on consumer protection has been cast as one of irresponsible lending versus irresponsible borrowing, but I think this way of framing the issues underplays the important microprudential elements that regulators failed to police. So my presentation of consumer and investor protection issues would be presented, not so much from the point of view of consumers and investors themselves but from the point of view of regulators and shareholders.)

• General consumer and investor protection
  • HMDA etc.
  • Fed and traditional agencies
  • CFPB
  • SEC
• CRA
• Cards
  • Incl. Durbin (fees), smart cards, etc.

VII. Depositor Protection

• Origins & comparisons
  • Including the financial stability and liquidity roles depositor protection plays
• Moral hazards & influence on regulation
  • Including whether depositor protection achieves its goals or perhaps makes things even worse

VIII. Supervision

• Supervisory process
• Enforcement
• SFI regulation

(This whole section could form the heart of the evaluative discussion with the class on market v. regulatory failure, our inability to take regulation seriously, whether internal constraints such as ethical and moral precepts might offer better alternatives, and whether some of the ambitions of regulatory constraints—such as preventing systemic failures—are achievable.)

IX. Liquidation

• Why banks are handed differently through the receivership rather than the bankruptcy process  Traditional FDIC receivership (incl. conservatorship)
• Living Wills
• SFIs
  •     Incl. GSFIs and cross-border resolution

X. So What Will Happen in the Next Crisis?

• I.e., an evaluation of the reforms and current approach to banking regulation

#    #    #

In the final result, some large chunks of the casebook will be left out and I will again provide substantial legal and non-legal supplementary material. Basically I need a whole new type of coursebook, but that is another story . . .

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