Grey matters






Douglas W. Arner & Cyn-Young Park, “Global Financial Regulatory Reforms: Implications For Developing Asia”, ADB Working Paper Series On Regional Economic Integration No. 57

Available at

The objective of global regulatory reform is to build a resilient global financial system that can withstand shocks and dampen, rather than amplify, their effects on the real economy. Lessons drawn from the recent crisis have led to specific reform proposals with concrete implementation plans at the international level. Yet, these proposals have raised concerns of relevance to Asia’s developing economies and hence require further attention at the regional level.

We argue that global financial reform should allow for the enormous development challenges faced by developing countries – while ensuring that domestic financial regulatory systems keep abreast of global standards. This implies global reforms should be complemented and augmented by national and regional reforms, taking into account the very different characteristics of emerging economies’ financial systems from advanced economies.

Key areas of development focus should be (i) balancing regulation and innovation, (ii) establishing national and cross-border crisis management and resolution mechanisms, (iii) preparing a comprehensive framework and contingency plan for financial institution failure, including consumer protection measures such as deposit insurance, (iv) supporting growth and development with particular attention to the region’s financial needs for infrastructure and for SMEs and (v) reforming the international and regional financial architecture.

CFR comment
As Asia continues to be the region most successful at dealing with the ongoing financial crisis, international reform measures are going to have to come to grips with Asian economies’ interests. This paper, one of whose co-authors is a leading academic at the University of Hong Kong’s School of Law, offers an important point of view on how Asian economies’ interests may be expressed in future reforms.

David S. Miller, Unintended Consequences: How US Tax Law Encourages Investment in Offshore Tax Havens

(4 October 2010) available at

The Internal Revenue Code is riddled with features that allow US taxpayers to reduce their federal tax liability by operating through tax haven companies. Some of these provisions are historic anomalies. Others are better understood as inadvertent loopholes than considered legislative grace. Some incentives are indeed intentional.

The paper catalogues the many ways that US federal and state tax law encourages taxpayers to operate through foreign tax haven companies to reduce their tax liabilities, and attempts to explain the history and policy underlying the rules. The paper then offers a number of suggestions to eliminate the inadvertent incentives that encourage US taxpayers to form foreign corporations and operate through them solely for tax purposes.

CFR comment
An excellent catalogue of the ways in which US tax laws encourage the use of offshore structures and a list of ways the US could change rules to discourage it. It would not be irrational for a Congressional tax committee use this as a starting point for a tax law revision. But Congress is not necessarily a rational place.

Ouarda Merrouche & Erlend Nier, Payment Systems, Inside Money and Financial Intermediation, World Bank Policy Research Working Paper No. 5445 (Oct. 1, 2010)

(Oct, 1, 2010) available at:

This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Two channels are investigated. First, innovations in wholesale payments technology enhance the security and speed of deposits as a payment medium for customers and therefore affect the split between holdings of cash and the holdings of deposits that can be intermediated by the banking system.

Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds, which reduce the need for banks to hold excess reserves. The authors examine these links empirically using payment system reforms in Eastern European countries as a laboratory. The analysis finds evidence that reforms led to a shift away from cash in favour of demand deposits and that this in turn enabled a prolonged credit expansion in the sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, this effect was not causal for the credit boom observed in these countries.

CFR comment
This is a tremendous paper that creatively uses data to ask and answer some important questions about the value of a key part of the financial system. Investors and those who work with them should be interested, since it tells us something important about which financial systems are more robust.

Dong He and McCauley, Robert N., Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues (September 1, 2010). BIS Working Paper No. 320.

Available at SSRN:

We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency while still allowing the authorities to retain a measure of control over the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euromarkets shows that policy options are available for managing such risks.

CFR comment
If you care about the outside-China use of the RMB, this is a paper you need to read, since this paper provides a careful analysis of the growth of Hong Kong-based RMB banking despite China’s capital controls.

LEORA F. KLAPPER & INESSA LOVE, The Impact of the Financial Crisis on New Firm Registration, World Bank Policy Research Working Paper No. 5444

(Oct. 1, 2010) available at:

The authors use panel data on the number of new firm registrations in 95 countries to study the impact of the business environment and 2008 financial crisis on new firm registration. The data show that more dynamic formal business creation occurs in countries that provide entrepreneurs with a stable legal and regulatory regime, fast and inexpensive business registration process, more flexible employment regulations, and low corporate taxes. The data also show that nearly all countries experienced a sharp drop in business entry during the crisis. This drop is more pronounced in countries with higher levels of financial development and countries more affected by the crisis.

CFR comment
To the extent the financial crisis has taken us into uncharted territories, papers like this one are helpful by quickly getting some solid empirical work on the impact of the crisis into the discussion. This is a careful and well-thought out paper that creatively uses data, including indices created by others (e.g. a quite good index of financial turbulence), to assess what’s going on.

The most interesting results are on the differential impact of the financial crisis on firm creation.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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