Publication Date

Summer 2023

Journal

University of Pennsylvania Journal of Business Law

Abstract

Bank runs, and the financial crises they catalyze and amplify, are incredibly costly-to individuals, families, society, and the economy writ large. Banking regulation has, for the most part, protected us from traditional bank runs for the last ninety years. However, as we saw in the devastating 2008 financial crisis, bank runs can still occur in lightly regulated or opaque segments of the financial sector.

The recent crypto market downturn dramatically forewarned regulators of the potential and significant risks that novel assets could pose to our financial system's stability. In particular, a novel, systemically important asset (stablecoins) revealed its vulnerability to bank run dynamics, demonstrating that a future run on this relatively unregulated, yet now widely-held, asset could trigger or amplify another Great Recession-type event. Yet the government's macroeconomic policy toolkit (which includes successful traditional tools like deposit insurance and emergency lending) is not equipped to respond to quick bank runs on these novel assets, and new regulatory or statutory "fixes" are unlikely.

With these vulnerabilities in mind, this Article advances a novel policy alternative: the Cooperative Enforcement Doctrine. The Doctrine revives a forgotten approach to bank runs-namely, suspending the convertibility of deposit contracts-and posits that courts should act as emergency enforcers of macroeconomic cooperation through the temporary and selective nonenforcement of debt contracts in times of financial stress. By doing so, courts could effectively halt bank runs, especially in situations where other regulatory responses are not viable or implementable, such as a run on stablecoins. Furthermore, unlike new policy "fixes," the Doctrine would not need any congressional or agency implementation-the contractual doctrine of public policy is available to serve as a solid buttress for its application.

Volume

25

First Page

595

Publisher

Penn Carey Law

Keywords

Bank runs, financial stability, stablecoins, contracts, cryptocurrency, public policy doctrine

Disciplines

Banking and Finance Law | Business | Contracts | Law

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