Triggers of Financial Markets Regulation

Triggers of Financial Markets Regulation

Elisabetta Bellini

It is a common idea that financial markets regulation has a cyclical nature: (i) during market rises there is no political demand or interest for reform; (ii) when the market collapses there is strong political pressure for a change and legislators act accordingly. The result is that market collapses trigger "stronger regulation" (typically more burdensome disclosure for issuers), whose goal is to foster again investor confidence through a higher level of investor protection. Through case analysis, this article argues that reality does not correspond to a unique and straightforward pattern: (a) "strong" and "soft regulation" coexist in periods of either good or bad market performance; (b) "strong regulation" can be grounded on political rationales other than enhanced investor protection following market crashes and scandals; (c) the political need for reform, even in periods of bad market performance, can produce "strong" as well as "soft regulation". Therefore, there is no unilateral relationship between the economic context and the kind of rules enacted in financial markets. In times of "emergency legislation", looking at past experiences may be useful in order to find out and enact not only "stronger regulation", but better regulation.

Law and Financial Markets Review, Vol. 3, No. 2, Mar 2009: 168-187.

Online

Originally Published: 
01/01/2011