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서브프라임 대출관련 금융위기의 원인과 금융법의 새로운 방향 모색

Subprime Crisis: Analysis of Causes and Search for New Direction of Financial Law

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국제거래법학회 (Korea International Trade Law Association)|2008.12|국제거래법연구 (Korean Forum on International Trade and Business Law)|제17권 제2호|pp. 3-57

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금융위기신용평가주택담보대출financial crisis자기자본규제credit default swapmortgage loancredit ratingsubprime mortgagesecuritization서브프라임 모기지유동화투자은행investment bank금융법신용파생거래신용스왑MBS(mortgage backed securities)CDO(collateralized debt obligations)financial lawcredit derivativescapital adequacy regulation
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초록

This article reviews the causes of the subprime crisis from a legal and regulatory perspective, found lessons from the subprime crisis and proposes a new direction for financial laws. Subprime related activities in the financial market are composed of three stages: (1) extension of subprime loans, (2) securitization of loan receivables and issuance of mortgage-backed securities and collateralized debt obligations, and (3) investment in such securities. We can find certain activities of the participants in the financial market and certain legal and regulatory aspects in each stage as having contributed to the occurrence of the crisis. At the first stage (extension of subprime loans), it appears that there was insufficient regulation and supervision of the business and risk management of mortgage lenders, which resulted in weak underwriting standards, unsound lending activities and unsound risk management. Securitization of loan receivables caused lenders to have less incentive to apply strong underwriting standards or monitor loans carefully. In addition, certain law and practice in the U.S.(such as defaulter-friendly anti-deficiency laws and practice) could have encouraged borrowers to default in the event of a housing price decline. This article reviewed the role of rating agencies and investment banks in the second stage (securitization). Rating is one of the most important factors in issuing structured financial products such as CDOs. A number of U.S. and international financial regulators indicated potential problems in rating including conflicts of interest. From a legal and regulatory perspective, there is an imbalance between the use of ratings in the market and supervision of rating agencies. Various regulations require or encourage the use of credit ratings as investment criteria or risk assessment standards. However, rating agencies have not been regulated in the U.S. until recently and the current laws and regulations provided for limited supervision. In addition, rating agencies are protected by certain exemption provisions under securities law and the constitutional freedom of speech right. Some of these regulations are expected to be changed in light of the role of credit rating agencies in structured financial products. Investment banks acting as arranger and/or distributor of securitized financial products are supposed to exercise due diligence in producing such products and appropriately disclose the risks therein. We need to monitor the investigations and court decisions on lawsuits on this issue to learn whether investment banks actually fulfilled such duties. In addition to the over-reliance on ratings and weak risk management of investors, which is mentioned by a number of commentators, several issues are reviewed. Loose regulations regarding the use of off-balance sheet entities made the early discovery of the level of problem assets held by financial institutions difficult. It is questionable whether the capital adequacy regulation of U.S. investment banks, particularly the consolidated supervision entities program was appropriate for such entities. U.S. regulators did not have sufficient information on market activities involving credit default swaps because credit default swaps are outside the scope of regulation. The subprime crisis shows that financial transactions are designed, and the current financial markets were used, to transfer not only funds but also risks. Transactions designed to transfer risks are increasing. We should review financial laws and regulations from the perspective of risk. Financial laws and regulations should be improved to ensure that accurate and sufficient risk information flows through the financial market so that the party purchasing or accepting risks are able to make an informed decision. They also need to ensure that gatekeepers of financial market such as investment banks and rating agencies perform their functions properly. The role of regulators and international coordination among regulators are becoming more important. Korean regulators should become more active in the dialogue and coordination among regulators of other jurisdictions.

Abstract

This article reviews the causes of the subprime crisis from a legal and regulatory perspective, found lessons from the subprime crisis and proposes a new direction for financial laws. Subprime related activities in the financial market are composed of three stages: (1) extension of subprime loans, (2) securitization of loan receivables and issuance of mortgage-backed securities and collateralized debt obligations, and (3) investment in such securities. We can find certain activities of the participants in the financial market and certain legal and regulatory aspects in each stage as having contributed to the occurrence of the crisis. At the first stage (extension of subprime loans), it appears that there was insufficient regulation and supervision of the business and risk management of mortgage lenders, which resulted in weak underwriting standards, unsound lending activities and unsound risk management. Securitization of loan receivables caused lenders to have less incentive to apply strong underwriting standards or monitor loans carefully. In addition, certain law and practice in the U.S.(such as defaulter-friendly anti-deficiency laws and practice) could have encouraged borrowers to default in the event of a housing price decline. This article reviewed the role of rating agencies and investment banks in the second stage (securitization). Rating is one of the most important factors in issuing structured financial products such as CDOs. A number of U.S. and international financial regulators indicated potential problems in rating including conflicts of interest. From a legal and regulatory perspective, there is an imbalance between the use of ratings in the market and supervision of rating agencies. Various regulations require or encourage the use of credit ratings as investment criteria or risk assessment standards. However, rating agencies have not been regulated in the U.S. until recently and the current laws and regulations provided for limited supervision. In addition, rating agencies are protected by certain exemption provisions under securities law and the constitutional freedom of speech right. Some of these regulations are expected to be changed in light of the role of credit rating agencies in structured financial products. Investment banks acting as arranger and/or distributor of securitized financial products are supposed to exercise due diligence in producing such products and appropriately disclose the risks therein. We need to monitor the investigations and court decisions on lawsuits on this issue to learn whether investment banks actually fulfilled such duties. In addition to the over-reliance on ratings and weak risk management of investors, which is mentioned by a number of commentators, several issues are reviewed. Loose regulations regarding the use of off-balance sheet entities made the early discovery of the level of problem assets held by financial institutions difficult. It is questionable whether the capital adequacy regulation of U.S. investment banks, particularly the consolidated supervision entities program was appropriate for such entities. U.S. regulators did not have sufficient information on market activities involving credit default swaps because credit default swaps are outside the scope of regulation. The subprime crisis shows that financial transactions are designed, and the current financial markets were used, to transfer not only funds but also risks. Transactions designed to transfer risks are increasing. We should review financial laws and regulations from the perspective of risk. Financial laws and regulations should be improved to ensure that accurate and sufficient risk information flows through the financial market so that the party purchasing or accepting risks are able to make an informed decision. They also need to ensure that gatekeepers of financial market such as investment banks and rating agencies perform their functions properly. The role of regulators and international coordination among regulators are becoming more important. Korean regulators should become more active in the dialogue and coordination among regulators of other jurisdictions.

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