Document Type

Book Chapter

Publication Date

2010

DOI

https://doi.org/10.1515/9783899496321.2339

Abstract

The quest for integrating financial markets into a single global marketplace has produced a host of legal and regulatory measures over the past two decades aimed at taming national protectionism, easing access to foreign markets, and lowering the regulatory burden for financial intermediaries that operate trans-nationally. Home country regulation and supervision – based on commonly agreed prudential standards – has become the core principle in the design of regulatory structures. This principle, first established as the “Basel Concordat” in a series of reports issued by the Bank of International Settlement in Basel has also informed financial regulation in the EU. Indeed, the European passport system, which allows a financial intermediary that has been duly licensed in one member state to offer financial services and establish branch offices in other member states without requiring additional regulatory approval in the host state, can be viewed as a strengthening of the home-host country regulatory principle.

This paper questions the soundness of this principle as the primary means for governing interdependent financial markets. It draws on the lessons from the global financial crisis, which has exposed the vulnerability of host countries’ financial system to regulatory abstinence by home countries of transnationally operating financial groups. The problem has become acute because of increasing financial interdependence: As emerging markets in Eastern Europe and Latin America opened their borders to foreign financial investors they have witnessed large parts of their financial systems being taken over by foreign groups and capital channeled across their borders. This in turn has exposed these countries to risks emanating from activities of these financial groups. Even the UK with its long tradition of financial market development has found itself at risk from parent banks in Iceland with extensive branch and Internet operations in the UK. In contrast, existing templates for transnational financial regulation as embodied in EU law or the Basel Concordat are primarily concerned with the opposite scenario, namely risks emanating from a host country’s failure to regulate a subsidiary to the parent company and its home market. Moreover, in a world of mobile capital entity based regulation captures only a fraction of capital flows, which can just as easily be channeled into direct lending, securities, or through unregulated financial intermediaries as through intra-group relations between parents and subsidiaries.

Disciplines

Banking and Finance Law | Law | Law and Economics

Comments

The final publication is available at www.degruyter.com.

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