The Global Financial Crisis and the Disclosure Paradigm in European Financial Regulation: The Case for Reform

41 Pages Posted: 13 Oct 2009 Last revised: 4 Nov 2009

See all articles by Emilios Avgouleas

Emilios Avgouleas

University of Edinburgh - School of Law

Date Written: October 9, 2009


The global financial crisis has exposed the many limits of disclosure as an effective regulatory tool in financial markets. First, the famed disciplining power of the market failed to constrain disastrous risk taking by banks. Second, most of the risks that led to the creation of the 2008 catastrophe were often fully disclosed but the markets failed to understand them. In the case of banks, disclosure-based market discipline failed mainly because of the implicit government guarantee. In the case of capital markets, the reasons for disclosure’s failure were product complexity and the impact of socio-psychological factors. Yet much of European Financial Regulation is based on the disclosure paradigm to remedy market failure, discipline market actors, improve investor/consumer choice, and prevent abuse. The EU needs to re-examine the role of disclosure in two contexts: prudential regulation of banks and retail investor protection. EU policy-makers should use empirical and experimental studies before any reform of the investor protection framework. Insertion of default options in a variety of financial contracts may be a necessary supplement to disclosure for retail investors. Furthermore, an independent EU financial products committee would be a better regulatory protection strategy than reliance on investor choice assisted by enhanced disclosure.

Keywords: EC Banking Regulation, EC Securities Regulation, Mandatory Disclosure, Global Financial Crisis, Subprime lending, Credit Ratings, Behavioural Decision Theory, Irrational Exuberance, Bounded Rationality, Strategic Trade Behaviour, Basel Capital Adequacy Accord, Experimental Law and Economics

JEL Classification: G01, G20, G24, G28

Suggested Citation

Avgouleas, Emilios, The Global Financial Crisis and the Disclosure Paradigm in European Financial Regulation: The Case for Reform (October 9, 2009). European Company and Financial Law Review, Vol. 6, No. 4, 2009, Available at SSRN:

Emilios Avgouleas (Contact Author)

University of Edinburgh - School of Law ( email )

Old College
South Bridge
Edinburgh, EH8 9YL
United Kingdom

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