Natasha Sarin, newly appointed Assistant Professor of Law with a secondary appointment in the Finance Department at the Wharton School, comes to Penn Law and Philadelphia most recently from Harvard University. Professor Sarin’s research interests lie at the intersection of law and finance, with a focus on financial regulation. Penn Law’s Office of Communications spoke with her about her upcoming plans at Penn and her latest research.
Penn Law: What brought you to Penn Law?
Natasha Sarin: I’ve been drawn to legal academia, and particularly being able to study questions at the intersection of law and finance. I’m finishing a Ph.D. program in economics at Harvard, and I went to Harvard Law School before then. When looking for my next home, there was no place other than Penn at the top of my list. It is both a wonderful law school community that is very collegial, and very much a group of scholars who are interested in a variety of topics and excited to hear you talk about your work.
For me particularly, having the ability to be close to Wharton and close to the Economics department was really important. Philadelphia is also a very central place that makes the work that I do a little bit easier, since it’s very accessible to research opportunities in Washington, DC, and I’m close enough to talk with large banks that are in located in New York.
PL: What kind of scholarship do you work on at the intersection of finance and law?
NS: My particular interests at this moment in my academic career are on financial regulatory questions. My broad animating question is to try and understand when financial regulation is likely to be effective.
I’m an empirical economist, and I use various data sets to try to tease out the extent to which pieces of [the] Dodd-Frank [Wall Street Reform and Consumer Protection Act] worked the way they were supposed to, or didn’t work the way they were intended. I’m interested in regulatory questions from both a consumer finance perspective and a more macroprudential risk management perspective.
The reality is that the current system really doesn’t work well for people who are lower income in our society because we have banks that charge them exorbitant fees. Consumers then don’t want to go to banks because of those fees and instead turn to alternatives like payday lenders, which end up charging even higher fees.
As regulators, we don’t quite have a handle on how best to intervene in these markets to make them work better for people. And as interested academics in this space, we don’t yet know what kinds of institutions are going to be most effective at helping this particular class of consumers. I’m really interested in trying to participate in that discussion.
I also have several papers that address macroprudential risk questions, like how much capital big banks should be forced to hold, and whether banks today look much safer or better equipped to survive the next financial crisis than they were 10 years ago.
PL: What projects are you currently working on?
NS: So many. My Ph.D. dissertation is on an aspect of Dodd-Frank called the Durbin amendment, which was a restriction on debit swipe fees. The swipe fee is the fee a merchant pays for processing a particular transaction. Durbin capped that fee at 21 cents per transaction, no matter the dollar amount you spend. The idea behind Durbin was that it would reduce merchant fees, merchants would pass through their savings to consumers in the form of lower prices, and consumers would be overall better off.
The reality of Durbin, at least as far as my empirical analysis suggests, is that on the bank side, banks took this hit in the form of less revenue from these swipe fees, and they adjusted by charging other kinds of fees to consumers. It’s like regulatory whack-a-mole, which a lot of academics talk about in the context of finance and more broadly as well.
On the merchant side, merchants took the opportunity to just eat the profits and not really pass them through to consumers in any meaningful way. So, you have this regulatory intervention that may have been well-intentioned to help consumers, but overall consumers are actually being hurt.
I’m also starting work around trying to understand various aspects of the overdraft space. As a result of interventions post-crisis, [regulators] changed the rules around overdrafts so that you couldn’t be charged an overdraft fee unless you had affirmatively opted into a bank’s overdraft protection.
What we’re trying to understand is the extent to which that has actually helped consumers, because now only 15 percent of accounts are opted in rather than 100 percent of accounts pre-crisis. But there’s some pushback in the legal academy based on concern the banks are now specifically targeting the consumers who generate a lot of overdraft revenue for them to opt in.
On the macroprudential side, I’m working with Larry Summers – who was my advisor in graduate school – on trying to understand the extent to which stress tests are providing information that is accurate or feels right about the state of bank health, or if they’re painting an overly optimistic picture. If that’s the case, what kinds of modifications to the stress test do we envision that can help us get a more accurate picture about whether banks are going to be able to withstand the next crisis?
PL: How will your research inform your teaching here at Penn Law?
NS: I am hoping both that my research will inform my teaching, and that my teaching will inform my research. On the first side, something that struck me in law school was that although there were a lot of people who were going to go into corporate law or who were interested in financial institutions, the nature of the classes, because they were situated in the law school, was that you didn’t do a lot of the things that you would do in a core finance course: understanding balance sheets, thinking through whether an investment opportunity makes sense, testing whether a firm experienced abnormal returns when its earnings were announced. I think those are really important skills for lawyers, and I think I’m well-equipped to try to make finance a little bit less intimidating to people who don’t necessarily have that background.
On the other side, because I’ve been situated in an economics department doing a finance Ph.D. for the last five years, I’m quite keen to be the kind of academic who’s able to take legal insights on different financial regulatory questions and integrate them into the kind of research that I do, and come with a knowledge of institutions and institutional detail that is often quite lacking in finance academia.
I’m going to be teaching corporate finance and also banking law, and teaching those classes and being engaged with the current debates in the law will actually provide me a lot of relevant background and insights for my own work.
PL: What are you most looking forward to about your first year at Penn?
NS: The parts of law school that I loved most were the relationships I had with my classmates and the relationships I had with faculty, many of whom are my mentors and advisors that I still look up to tremendously in my own career. I’m really excited about being that kind of person, I hope, to this next generation of law students. What is most exciting about Penn is that it feels like a community where those sorts of relationships are organically developed. I’m excited about being part and parcel of the experience for students that are thinking through this next stage of their careers.