Financial Stability and the Global Influence of EU Law

Abstract

This chapter, a version of which will appear in Cremona and Scott (eds), EU Law Beyond EU Borders The Extraterritorial Reach of EU Law, OUP, considers the influence of European Union law in the post-crisis regulation of financial institutions. The global nature of the financial crisis of 2007-2009 created incentives for jurisdictions to “export” their legislative solutions globally, in order to promote domestic stability. The chapter begins by using an analysis of the development of the crisis from a domestic US sub-prime lending problem into a global lack of trust in financial institutions, with a consequent credit crunch and state bail-outs of the biggest failing institutions, to illustrate these incentives. However, a crude strategy of export is likely to produce adverse reactions from other jurisdictions. The potential for friction was reduced by two developments. First, a rapid expansion of international standards of financial regulation and, second, using some form of mutual recognition strategy at the level of individual jurisdictions. The chapter argues that the European Union had relatively little influence on the first strategy because representation of “Europe” within international standard-setters is still dominated by the individual Member States rather than by the EU institutions. On the other hand, with the adoption of a Union level common rule book, implementation of the second strategy did fall into the hands of Union institutions.

The second part of the chapter consists of a case study of the long drawn-out process whereby the EU and the US achieved recognition of each other’s rules on central counterparties for derivatives clearing. Despite the existence at G20 level of an agreement on the central clearing of derivatives, which both the EU and the US sought to implement, achievement of mutual recognition on this topic was slow, marked by bad-tempered interchanges and initially developed through a process likely to highlight differences rather than commonalities. The chapter concludes by exploring some possible explanations for this history and examines the potential operation of the equivalence regime in a post-Brexit world.

Keywords: Financial crisis, international standards, mutual recognition, central clearing, equivalence, EU law

JEL Classification: K22, K33