Elgar Financial Law series
Edited by Kern Alexander and Niamh Moloney
Kern Alexander and Niamh Moloney The recent history of financial markets suggests that financial crises are recurring more frequently, that traditional regulatory controls have failed to control risk, including systemic risk, and that legal and regulatory reforms are necessary to control the huge social costs that can be imposed on the economy and society by excessive financial risk-taking. Regulation must become more adaptive. One of the important lessons of the global financial crisis is that the effective regulation and supervision of financial markets requires continuous adaptation of rules and supervisory practices as the markets themselves evolve: the nature of the instruments traded, the efficacy of institutional structures and the degree to which national and international markets are integrated, for example, must all be reflected in regulatory and supervisory systems. In the past decade the speed of change has accelerated and has had wide-reaching effects on global markets. This was particularly evident in how the risks that were growing in the US subprime mortgage market just prior to the outbreak of the crisis in 2007 were transmitted via the structured finance markets to European banks and to other investors globally. Law and regulation, both ‘on the books’, in terms of regulatory design, and ‘in action’, in terms of supervisory practices and enforcement, were notably deficient in responding to changes to financial markets over the global financial crisis. Private law and public law were both implicated. Weaknesses in private law and contracting frameworks, such as the model contracts governing the vast over-the-counter...