Financial Crisis: An Opportunity for International Law?

Apart from this year’s US elections, the looming financial crisis has dominated most of the recent headlines. Or have I been too bearish? Unlikely. Most commentators agree that the scale and manner in which these financial institutions have collapsed is unprecedented. Still, Wall Street continues to break records as share prices fell again today.

Integrated financial markets mean that America‘s bears will inevitably (or have already) cross(ed) the Atlantic and Pacific Oceans to do damage to other markets. Recently, the European Central Bank announced that it will not be able to fund a bail out in the same manner that its US counterpart plans to. Asia looks West and remembers its 1997-98 financial crisis and contemplates the effects of the forecasted slow down in China‘s economy.

The pertinent question for international lawyers:- Can international law provide a solution?

In my mind, international law in this field is caught between two competing policies. On one hand, there is a danger that looming financial crisis will prompt domestic jurisdictions into over-regulation. On the other hand, as demonstrated above, there is a real need for states to protect their capital markets from “knock-on” effects of another state’s financial crisis. The IMF and World Bank have been the traditional institutions in the business of balancing these objectives. However, the old debate between “conditionality” and “sovereignty” may prevent them from making substantial headway.


So, the first issue to resolve is perhaps, what kind of cooperation is appropriate to prevent or mitigate the “domino effects” of financial crisis? The second issue is, what kind of incentive structures should be used to achieve that cooperation?


Just to throw some talking points out there, international investment law may be a good place to start a discussion on this. Does international investment law, as it stands, provide an efficient way of deciding how far a state may regulate its securities markets and portfolio investments? How many BITs provide for protection of portfolio investments? Perhaps, we may even look at WTO law’s mechanisms for invocation of “safeguards” as a framework for when a state may impose more protectionist capital controls.


Your thoughts, criticisms, comments on this are appreciated.


P.S. Some interesting work has been done on financial crises in the wake of financial crises in Latin America and Asia. See e.g. Douglas Arner et al, “The Global Credit Crunch and Securitization in East Asia” (2008) 3(3) Capital Markets Law Journal 291.



4 Responses to “Financial Crisis: An Opportunity for International Law?”

  1. jeremyleong Says:

    Prof. Daniel Drezner considered in his blog over the course of the last few days, together with some commentary from Paul Krugman and others, what the public policy responses to the financial melt down should be. See his blog:-

    I suppose if Paul Krugman doubts that a monetary policy response can be effective at this stage, it would be reasonable to doubt whether a legal response would be timely and effective. Perhaps (and being a little presumptuous), in the event we survive this mess, international law can play apart in the recovery process. I suspect over-regulation may be an obstacle in facilitating the flows of capital which a successful economic recovery may require. Hence, relevant international law may seek to 1. prevent over-regulating 2. yet provide states with enough regulatory space to protect their own markets in the event that history repeats itself.

    The million dollar question:- what incentives are there for states to cooperation in creating that international law? I suppose a good starting point is to project the demand for capital by states and price that against the risk of future financial collapse. This is primitive, of course. Analysis of other economic factors as well as international and domestic political economy will be necessary.

    Thoughts, comments?

  2. jeremyleong Says:

    Most recently, Pascal Lamy claims that the WTO “represents a mature, tested and sophisticated regulatory system”. He said it in the context of discussion which structures are available for international regulation of financial markets in the wake of the current financial crisis. See for the full text of his speech to the Finance Commission of the French National Assembly.

  3. […] A couple of days ago I asked if the current financial crisis was an opportunity for international law or at least international cooperation. See […]

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