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This article makes the case for developing law and macro-finance as an integrated research field that explores the role of credit and its regulation within the economic cycle. It highlights the importance of macro-financial conditions, such as leverage and liquidity, over traditional concerns like agency costs and efficiency when assessing the economic impact of the law. The article argues that the future of law and macro-finance research should focus on demonstrating (1) how the law operates under different macro-financial conditions, (2) how the law can shape these conditions, and (3) how these conditions influence legal frameworks. This research is partly inspired by, and could also be valuable for, organizations like the World Bank and IMF, which increasingly acknowledge the role of debt in financial crises and are beginning to promote policies that help countries better align the size of their credit markets with their economic needs. [ABSTRACT FROM AUTHOR]

This article considers the effects of legal protections of creditors within the macro-financial theory of leverage cycles developed by John Geanakoplos. The theory posits that leverage is procyclical. I propose a theoretical framework, 'Law and Macro-Finance', comprising two main clams: (1) the strength of legal protections of creditors has an impact on the quantum of debt creditors are willing to underwrite not just the interest rate on that debt and (2) that quantum varies across the cycle in a procyclical fashion. In a boom, when asset prices are higher, leverage decreases, creating incentives for creditors to underwrite additional leverage secured on those assets without increasing the interest rate. The stronger the legal protections of creditors, the stronger the incentives to underwrite additional leverage based solely on the increasing value of the collateral. By creating such incentives, strong legal protections of creditors, associated with claims designated in the law as 'bankruptcy remote', will accelerate the boom and increase the vulnerability of the economy to shocks. On the normative side, this article proposes a countercyclical design of strong legal protections of creditors. The design makes the availability of such protections, typically achieved by reliance on the legal doctrine of 'true sales', conditioned on the adequacy of the price paid in the transaction. The adequacy, in turn, is determined in reference to the applicable schedule of collateral haircuts determined by the central bank. [ABSTRACT FROM AUTHOR]

In this article, I propose that high levels of concentration in markets make the production of standardised contracts in those markets more likely to be captured by the dominant players creating opportunities for them to extract rents and further reduce competition through contract and market design. I examine how contracts produced by the International Swaps and Derivatives Association (ISDA) shaped the organisation and its activities. ISDA's governance was dominated by a concentrated group of dealer banks who benefited from the opaque OTC market microstructure revolving around ISDA's standardised contracts. The organisation's activities, such as lobbying and data collection, were aimed in part at preserving that microstructure allowing dominant firms to extract rents and reduce competition. In the absence of policy interventions, standardised contracts produced by trade associations can become captured in ways not dissimilar to public regulation. [ABSTRACT FROM AUTHOR]

This article develops an account of the mechanisms of efficiency of corporate loan markets and the secondary markets in which loans made to corporate borrowers are traded. In our account: (1) professionally informed trading is the primary source of corporate loan market efficiency; and (2) antitrust law is among the principal policy tools that can foster loan market efficiency by policing market participants' efforts to restrict professionally informed traders from accessing information in the loan market. In an efficient loan market, professionally informed traders incorporate information about the erosion of the quality of the underwritten terms into loan prices and prompt corrections in mispricing in primary markets, thereby contributing to the tightening of the terms subsequently offered in primary markets. From a policy perspective, efficient loan markets can help alleviate the concerns around the erosion of underwriting standards that have become widespread in recent years. [ABSTRACT FROM AUTHOR]