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Consequences of Uncertainty for Regulation: Law and Economics of the Financial Crisis

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  • Pacces Alessio M.

    (*Associate Professor of Law and Economics, Rotterdam Institute of Law and Economics (Erasmus School of Law, Erasmus University Rotterdam), and Research Associate, ECGI.)

Abstract

This article analyzes the last financial crisis focussing on the recurrent dynamics of externalities in banking. It shows that two major determinants of the crisis were the uncertainty of a new form of financial intermediation and the failure of regulation to cope with its externalities. Differently from more standard explanations, which are based on opportunism and/or irrationality of financial institutions, this analysis suggests that regulation has not just been insufficient. Regulation has contributed to financial instability too, supporting fragile conventions to handle uncertainty and encouraging regulatory arbitrage through financial innovation.

Suggested Citation

  • Pacces Alessio M., 2010. "Consequences of Uncertainty for Regulation: Law and Economics of the Financial Crisis," European Company and Financial Law Review, De Gruyter, vol. 7(4), pages 479-511, January.
    • Handle: RePEc:bpj:eucflr:v:7:y:2010:i:4:p:479-511:n:1
    DOI: 10.1515/ecfr.2010.479
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