Before the 2008-2009 global financial crisis, law was a necessary tool for financial markets. English financial law represents “the entire body of legal rules that govern and regulate financial markets, financial assets and financial transactions under the law of England and Wales”. It is classified as “a sub-species of English commercial law, which is heavily influenced by English common law”. According to Ellinger et al., « in order to safeguard the stability of the banking system, a degree of regulation and supervision needs to be imposed on banks themselves ». In this context, the United Kingdom passed the Financial Services and Markets Act 2000, which authorized the Financial Services Authorities to become « a super-regulator , having responsibility for the regulation and supervision of the whole financial services sector ». However, this regulatory system was not suited for adressing the difficulties the banks were going into during the global financial crisis of 2008-2009. After the crisis, law and regulation's role shifted to provide more protection for financial stability and for the prevention of any misconducts. The Banking Act 2009 was going to fill the gap in « dealing with pre-insolvency 'stabilization' and with banking insolvency and administration ». And a year later, the Financial Services Act 2010 was given the role of « strengthening the powers of the FSA and giving it a 'financial stability' objective. In this paper, we are going to critically discuss the different views on the role of law and finance before and after the financial crises areas.
Table of Contents
- Introduction
- Development
- Law and Finance
- Law and Economics
- Regulating the international economic system
- After the 2008-2009 Crisis
Objectives and Key Themes
This paper critically examines the role of law and regulation in financial markets, focusing on the period before and after the 2008-2009 global financial crisis. It explores the evolving relationship between law, economics, and the international regulatory landscape in shaping financial stability.
- The interplay between law and finance in ensuring market stability.
- The economic perspectives on the role of law in wealth maximization and market efficiency.
- The evolution of international financial regulation in response to crises.
- The effectiveness of international regulatory frameworks, such as the Basel Accords.
- The challenges of international cooperation in regulating financial markets.
Chapter Summaries
Introduction: This introduction sets the stage by outlining the crucial role of law in financial markets before and after the 2008-2009 global financial crisis. It highlights the shift in regulatory focus from facilitating market operations to prioritizing financial stability and preventing misconduct, referencing key legislation like the Financial Services and Markets Act 2000 and the Banking Act 2009. The introduction establishes the paper's objective: a critical analysis of differing perspectives on the law's role in finance across these periods. The importance of a robust legal framework for financial system stability and the prevention of market collapse are emphasized.
Development: Law and Finance: This section emphasizes the fundamental role of law in creating a stable and trustworthy financial system. It argues that a sound legal framework is essential for defining and protecting property rights, enabling efficient exchange, and fostering economic prosperity. The prominence of English law in international finance is highlighted due to its provision of certainty and predictability in contract enforcement. The section stresses the potential catastrophic consequences of a legal vacuum, illustrating the critical link between a strong rule of law and a thriving financial system. The inherent risks of operating without a clear, predictable legal framework are powerfully presented.
Development: Law and Economics: This section explores the intertwined relationship between law and economics, presenting the economic perspective that views law as fundamentally rooted in economic principles. It references prominent scholars like Posner and Coase, who argue that law aims to maximize wealth and efficiency in society. The importance of appropriate incentive structures and the role of law in regulating markets to reduce transaction costs and increase trade volume are discussed. The significant impact of institutions, particularly property rights and the rule of law, on economic growth and income disparity between nations is also analyzed using examples such as the IMF and World Bank's loan conditions.
Development: Regulating the international economic system: This section traces the evolution of international financial regulation, beginning with the Bretton Woods system and its subsequent challenges. It examines the impact of events like the end of US dollar convertibility to gold and the financial crises in Mexico and East Asia. The critical need for a strong legal foundation prior to implementing economic policy is highlighted, analyzing the Asian financial crisis as a consequence of weak legal and regulatory frameworks. The section introduces the New International Financial Architecture (NIFA) and its attempts to establish global standards for financial regulation through bodies like the G7 and Basel Committee. However, it also discusses the limitations of these frameworks, as exemplified by the ineffectiveness of Basel II in preventing the 2008 crisis.
After the 2008-2009 Crisis: This section analyzes the response to the 2008-2009 global financial crisis, focusing on the introduction of Basel III as a more stringent capital adequacy framework. However, it acknowledges the continuing challenges in achieving global financial stability, highlighting the prisoner's dilemma that arises from states prioritizing self-interest over cooperative regulatory action. The section concludes by summarizing the continuing importance of law in maintaining financial stability while also acknowledging limitations and the ongoing need for improvements in the regulatory framework.
Keywords
Financial law, regulation, financial stability, economic policy, international cooperation, Basel Accords, global financial crisis, rule of law, property rights, market efficiency, wealth maximization.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this paper?
This paper critically examines the role of law and regulation in financial markets, particularly focusing on the period before and after the 2008-2009 global financial crisis. It explores the interplay between law, economics, and international regulation in shaping financial stability.
What are the key themes explored in the paper?
Key themes include the interplay between law and finance in ensuring market stability; economic perspectives on law's role in wealth maximization and market efficiency; the evolution of international financial regulation in response to crises; the effectiveness of international regulatory frameworks (like the Basel Accords); and the challenges of international cooperation in regulating financial markets.
What time period does the paper cover?
The paper primarily analyzes the period before and after the 2008-2009 global financial crisis, examining how legal and regulatory frameworks adapted to and influenced events during this period.
What is the paper's objective?
The paper aims to provide a critical analysis of different perspectives on the role of law in finance, considering both the periods before and after the 2008-2009 crisis.
What are the key chapters and their summaries?
The paper includes chapters on: Introduction (setting the stage and outlining the paper's objective); Development: Law and Finance (emphasizing law's role in creating a stable financial system); Development: Law and Economics (exploring the economic perspective on law's role in wealth maximization and efficiency); Development: Regulating the international economic system (tracing the evolution of international financial regulation and highlighting challenges); and After the 2008-2009 Crisis (analyzing the response to the crisis and ongoing challenges in achieving global financial stability).
What specific legislation or agreements are mentioned?
The paper references key legislation such as the Financial Services and Markets Act 2000 and the Banking Act 2009, as well as international agreements and frameworks like the Bretton Woods system, the Basel Accords (including Basel II and Basel III), and the New International Financial Architecture (NIFA).
What are the key takeaways regarding the relationship between law and economics in finance?
The paper highlights the intertwined nature of law and economics in finance. It explores economic perspectives that view law as aiming to maximize wealth and efficiency, discussing the importance of incentive structures and the role of law in reducing transaction costs and promoting market efficiency. The influence of institutions, property rights, and the rule of law on economic growth and income inequality is also examined.
What are the main challenges in international financial regulation?
The paper discusses the challenges of international cooperation in regulating financial markets, highlighting the "prisoner's dilemma" where states prioritize self-interest over cooperative regulatory action. It also points to the limitations of international frameworks in preventing crises, as exemplified by the ineffectiveness of Basel II in preventing the 2008 crisis.
What are the key words associated with this paper?
Key words include: Financial law, regulation, financial stability, economic policy, international cooperation, Basel Accords, global financial crisis, rule of law, property rights, market efficiency, wealth maximization.
- Quote paper
- Jennie Robinson (Author), 2015, The Role and Character of Law in Financial Markets, Munich, GRIN Verlag, https://www.grin.com/document/432707
