The need and prospects for an enforcement mechanism in the post-crisis reconstruction of international financial regulatory architecture

Abstract

Successive episodes of financial crises raise the question of whether international financial law is insufficiently robust to support global financial stability. International financial law can be characterized today as a set of “soft law” rules and standards adopted voluntarily and differentially by individual states and lacking any real international enforcement mechanism. The pre-2009 system of international financial regulation failed to check financial excesses in globalized financial markets. Liberalization and globalization led to under-regulation accompanied by lack of accountability mechanisms and brought the failure of international financial institutions and systemic instability. The crisis that commenced in 2008 -the most severe blow to the international financial system since 1929 -calls for a fundamental re-design of regulatory standards, financial risk prevention and management mechanism and the international financial architecture. This study argues that a hard-law based international financial law (based on the enforcement of regulations) is essential for maintaining global financial stability as the existing soft-law based financial regulatory architecture failed not only to prevent and manage the crisis in 2008 but also in checking those financial excesses committed by the de-regulatory and liberal regimes which threatened global financial stability, the discipline of international financial law and its regulatory institutions. This study thus argues that a law-based enforcement mechanism for international financial regulation is essential for global financial stability. This research questions the fundamental basis of the existing international financial architecture (soft law) and explores the need for a compliance-based model (based on legitimacy of regulations and accountability of the regulatory bodies) in the international financial system. In so doing, this thesis proposes fundamental changes and alternative perspectives to the existing framework of international financial law which is in need of a fundamental re-design as has been proved by recurring episodes of financial disruptions.