Legal and Regulatory Responses to the Financial Crisis

Abstract:     
While there is consensus as regards the magnitude and severity of the crisis, there are contrasting - even opposing views - with regard to the understanding of the causes of the crisis and the types of regulatory responses that can best tackle the imbalances that were at its root and to fix the problems of the financial system. In this chapter, some of these responses are surveyed, in particular to the questions of: what to regulate and who regulates and how to regulate and the intensity of supervision. The chapter starts from the assumption that regulators often fight the last war; responses to crisis are by definition ex post. This combined with a degree of regulatory fatigue is a useful reminder of the limits of regulation. It also contends that we need international rules for global markets and much more effective cooperation amongst national authorities, and considers developments in the United States, United Kingdom, European Union. Inconsistent or uncoordinated national responses are inadequate in the presence of international financial markets. The modus operandi of central bankers is an example for politicians and treasury officials of a model of effective international cooperation. An underlying argument of this chapter is that the logic of capitalism requires that both gains and losses be privatized. The idea embedded in the too-big-to-fail doctrine (and its variants) that losses should somehow be socialized runs against this logic. The chapter concludes that good regulation needs to be flexible, proactive, countercyclical, and increasingly international. It should also rest upon a solid ethical dimension. We must also remember that markets are part of the solution since it is well functioning markets that generate growth.

Number of Pages in PDF File: 15

Accepted Paper Series