INTRODUCTION: WHITHER INTERNATIONAL LAW?
The global financial crisis has called into question the ability of the regulatory imagination to confront the challenges posed by financial innovation. With the spread of toxic mortgage-backed securities and complex derivatives around the globe has come the (now seemingly inevitable) collapse of sophisticated financial systems, throwing much of the developed world into recession. The theme of this panel is therefore extraordinarily pertinent. It raises the critical question: what is the role of international law in the regulation of global finance--and how effective are conventional international law paradigms in framing the modalities that govern international capital flows, actors, and risks?
In approaching this question, we are struck first and most glaringly by the absence of law. That is to say, despite the myriad multinational actors, transaction techniques like securitization and the interconnected sharing of risks between national borders (e.g., using credit derivatives like credit default swaps), finance seems to have entirely opted out of international law. Unlike disciplines such as international trade that create similar dependencies between national borders, international finance cannot point to a treaty or coercive adjudicative mechanism to document a regime for its regulation. Indeed, when searching for the hard edges of law in finance, there is little evidence that these exist, or even that there may be any norms-generative processes to create them. To say that the regulatory system is broken may be something of an anachronism: perhaps the reality is that the system did (and does) not exist at all?
This panel examines the interplay between international law, as conventionally understood, and financial regulation. In doing so, it unravels the implications of innovation, not just in transactional finance, but also in how finance is regulated. These remarks set the stage for the discussion that follows. Broadly, my aim is: (1) descriptive in showing that finance is in fact a highly regulated field of enquiry; (2) illustrative in demonstrating how it has evolved an extensive body of soft-law norms for its governance; and (3) analytical in questioning the longer-term effectiveness of these soft-law mechanisms, despite their success within the regulatory landscape in the last decade.
INNOVATIONS IN REGULATION
Financial regulators have long recognized their inter-dependencies and the dangers that international systemic risks can pose for their domestic economies. From the collapse of Germany's Herstatt Bank in 1974, setting off alarm bells in New York, to the now familiar failure of Lehman Brothers and AIG, liberalization of capital controls and the growth of technology has created deep interconnections between national economies. However, the regulatory response to these new risks has not been conventional. The collapse of Herstatt Bank (literally) overnight signaled the need for rapid coordination in crisis but also greater convergence in domestic regulatory standards in normal times, to create a level playing field of risk and reward sharing between regulators in the governance of borderless capital flows.
Instead of looking to treaties and customary international law, however, financial regulators evolved soft-law norms and standards to achieve this convergence and coordination. Starting with the Basel Capital Accords, which form the basis for the amount of capital institutions keep to support the risks that they take on, standard-setting has resulted in an expansive corpus of norms to regulate finance. These include standards aimed at regulators for instituting strong banking and securities market supervision domestically and on a cross-border basis, as well as standards targeted at market actors to foster harmonization in risk management practices, financial reporting, and corporate governance (e.g., with respect to executive compensation). …