Into the Void: Governing Finance in Central and Eastern Europe

Twenty years after the fall of the iron curtain-which for decades had separated East from West-most countries of Central and Eastern Europe are now members of the European Union; some have even adopted the euro. Nonetheless, these countries have alsofinancial regulation, global finance, home-host country regulation

LAW ENFORCEMENT UNDER INCOMPLETE LAW: Theory and Evidence from Financial Market Regulation

This paper studies the design of law-making and law enforcement institutions based on the premise that law is inherently incomplete. Under incomplete law, law enforcement by courts may suffer from deterrence failure, defined as the socialwelfare loss that results from the regime's inability to deter harmful actions. As a potential remedy a regulatory regime is introduced. The major functional difference between courts and regulators is that courts enforce law reactively, that is only once others have initiated law enforcement procedures, while regulators enforce law proactively, i.e. on their own initiative. Proactive law enforcement may be superior in preventing harm. However, it incurs high costs and may err in stopping potentially beneficial activities. We study optimal regime selection between a court and a regulatory regime and present evidence from the history of financial market regulationIncomplete law, law enforcement, financial market, regulation

Global Network Finance: Organizational Hedging in Times of Uncertainty

The global financial crisis that began in 2007 revealed a fundamental weakness in the global financial system: Extensive financial interdependence of financial relations unmatched by a governance regime of similar reach. As multinational banks sought to fortify their capital base in the wake of the unfolding crisis, Sovereign wealth Funds (SWFs) and the banks’ home governments have become mutual stakeholders in some of the largest financial intermediaries with global reach. From the multitude of individual transactions has emerged a network of equity ties that spans the globe. These ties bridge institutional practices and governance regimes that previously operated largely independently of each other. They have the potential of fostering the emergence of a new governance regime for the global financial market place that deviates from earlier prognoses that globalization entails convergence on a single governance model. Instead, the newly created ties that jointly add up to a global financial network enable institutionally and organizationally diverse players to contribute their own perspectives as joint stakeholders in selected financial intermediaries, and indirectly, in the global financial system. This is likely to have important implications for the behavior of these actors in the future and the emergence of new governance solutions for the global market place. The paper discusses two recent cases of collaborative re-capitalization events to illustrate how this regime is evolving in practice

On the Theoretical Foundations for Regulating Financial Markets

How we think about financial markets determines how we regulate them. Since the 1970s modern finance theory has shaped how we think about and regulate financial markets. It is based on the notion that markets are or can be made (more) efficient. Financial markets have been deregulated when they were thought to achieve efficient outcomes on their own; and regulation was designed to lend crutches to them when it appeared that they needed support. While modern finance theory has suffered some setbacks in the aftermath of the global crisis, defenders hold that improving market efficiency should still be the overriding concern for regulation. This essay raises the question whether this is indeed the case. What if other factors besides information costs affect the vulnerability of markets to crises? Two factors have been identified in the literature: Imperfect Knowledge and the Liquidity Constraint. This essay introduces the relevant theories that focus on these factors and discusses their regulatory implications

Towards a Legal Theory of Finance

This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts. This is the case especially in times of financial crises when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival of the system is at stake; that is, at its core. Here, power becomes salient. This helps explain why finance is concentrated around ultimate lenders of last resort and why regulating finance\u27s core has become so elusive. It also holds lessons for future reforms

Ideology and Institutions in the Evolution of Capital

In Capital and Ideology, Thomas Piketty poses the intriguing thesis that ideology, or ideas about how society should be governed, is a powerful determinant for how society will be governed-as long as we take advantage of historical switch points. In this review essay I challenge this thesis by pointing out that many powerful ideas have run aground because of countervailing institutional arrangements. Oftentimes, they are leftovers from earlier times that precede the change and are now strategically employed for reconstituting private wealth. Clearly, ideology and institutions are deeply intertwined. I credit Piketty for putting ideology on the map of institutionalists in history, political sciences, sociology, and law. I therefore call for more research on the interaction of ideas and institutions

Rethinking the Law and Finance Paradigm

The label Law and Finance stands for a body of literature that has dominated policy-making and academic debates for the past decade. The literature has its origin in a series of papers co-authored by Andrei Shleifer, Rafael La Porta, Florencio Lopez-de-Silanes and a cohort of other researchers, including Robert Vishny, Simeon Djankov et al. (hereinafter referred to as LLS et al.). More than ten years after Law and Finance was first published, it seems appropriate to step back and consider the contribution this literature has made, but also to point out where it has gone astray and deviated attention from what the critical issues are for Law and Finance and, more broadly, for law and development. The lead authors of this literature have given their own assessment of theirs as well as of related work in a paper that has recently been published by the Journal of Economic Literature, which I will refer to throughout this essay. The second part of this essay will be devoted to a critique of the Law and Finance paradigm. The third part will sketch out alternative strategies for analyzing the role of law and legal institutions and the relation between legal and economic change in comparative perspective

Legal Coding Beyond Capital?

Capital, I argue in ‘The Code of Capital: How the Law Creates Wealth and Inequality’, is coded in law. Legal coding is a process that adapts and molds formal law over time, often without explicit ex ante sanctioning by a legislature or a court. Several characteristics of formal law make it susceptible to coding, including its inherent incompleteness, the strong endorsement for private autonomy, and decentralised access to a state’s consolidated means of coercion. Would a progressive European Code of Private Law (EPL-code), as proposed by Hesselink, alter any of this and what would it take to ensure that the principles enshrined in this code would in fact be realised? These are the questions I will address in this short essay

Into the Void: Governing Finance in Central & Eastern Europe

Twenty years after the fall of the iron curtain, which for decades had separated East from West, many countries of Central and Eastern Europe (CEE) are now members of the European Union and some have even adopted the Euro. Their readiness to open their borders to foreign capital and their faith in the viability of market self-governance as well as supra-national governance of finance is both remarkable and almost unprecedented. The eagerness of the countries in CEE to join the West and to become part of a regional and global regime as a way of escaping their closeted socialist past has both benefited and harmed them. There is little doubt that joining the EU and opening to the rest of the world has helped transform these economies at a pace that otherwise would have been unthinkable. Yet, as the global financial crisis reveals, these countries have also remained exceptionally vulnerable to shocks, including those that originate beyond their sphere of influence. This paper looks for explanations in the governance of finance, i.e. the allocation of de jure and de facto responsibilities over financial systems. It argues that as recipient countries of massive capital inflows CEE countries have largely relinquished policy tools to protect their economies and societies against a financial melt down or to respond effectively in a crisis. The policy choices they made – opening their boarders to capital inflows, limiting regulatory oversight by relying on home country regulators of foreign banks, etc. – were aimed at integrating them into the European and the global financial systems. A frequently overlooked side effect of these policies’ cumulative effect has been that they find themselves once more on the periphery – dependent on the goodwill of multilateral organizations over which they have little sway. The paper discusses two strategies to improve the governance of finance in CEE: A European regulator and the assertion of effect-based regulatory jurisdiction over foreign bank activities