European Financial Regulation
Course - Prof. dr. Colaert Veerle
Practical information
There is no prerequisite for this class, but it is linked with the “European Banking and
Investment Services law” courses.
Materials: PowerPoint presentation (Toledo), class notes, legislation, and case law (reader
available at cursusdienst), background materials (Toledo, not compulsory).
Assignments: FT articles or movie clips in Toledo to introduce you to a theme and eventually
spark the discussion.
Rules: you can’t write in your reader, except for post-it (only name of the regulation / rule),
highlighting, circling, underlining, or cross-referencing (“cf. X or Y”).
Exam: written exam, closed book (except for legislation and case low without annotations and
dictionary), +/- 4 essay-style questions (the number of lines indicates the expected length of
the answer: cf. PowerPoint for common types of questions), explain several concepts in two
lines…
Part 0 – Introduction
Deregulation within the financial sector engenders a milieu susceptible to disruption and, on
occasion, deleterious ramifications, a phenomenon grounded in various fundamental
rationales:
1. Risk-Taking Incentives: Deregulation often reduces government oversight and
constraints on financial institutions. This can create incentives for these institutions to
take on more risks, as they may believe they can operate with fewer consequences.
Increased risk-taking can lead to financial bubbles, market instability, and ultimately,
financial crises.
2. Lack of Transparency: Deregulation can reduce transparency in financial markets.
When there are fewer regulations requiring disclosure of financial information and
practices, it becomes harder for investors and regulators to monitor and assess the health
of financial institutions. This opacity can lead to market manipulation and fraud.
3. Inadequate Safeguards: Deregulation may weaken or eliminate safeguards that were
put in place to protect consumers and the environment. For example, in the context of
environmental disruption, deregulation may reduce environmental regulations and
enforcement, allowing industries to engage in practices that harm the environment
without sufficient oversight.
4. Short-Term Focus: In a deregulated environment, financial institutions may prioritize
short-term profits over long-term stability or sustainability. This can lead to a focus on
speculative trading, risky investments, and practices that prioritize immediate gains
without considering the potential long-term negative consequences.
Page 1 of 106
, 5. Systemic Risk: Deregulation can increase systemic risk, where the failure of one
institution or market participant can have cascading effects throughout the financial
system. The 2008 financial crisis is a stark example of how deregulation allowed the
buildup of systemic risk, leading to a global financial meltdown.
6. Environmental Consequences: In the context of environmental disruption,
deregulation can weaken environmental protections, allowing industries to exploit
natural resources without adequate consideration of the environmental impact. This can
lead to pollution, habitat destruction, and other negative environmental outcomes.
7. Lack of Accountability: Deregulation may reduce accountability for financial
institutions and other stakeholders. When regulations are lax or poorly enforced, it can
be difficult to hold individuals and organizations responsible for unethical or reckless
behaviour.
8. Uneven Distribution of Benefits and Costs: Deregulation can result in the unequal
distribution of benefits and costs. For example, financial institutions may profit greatly
from deregulation while the broader society bears the costs of financial crises or
environmental damage.
9. Market Manipulation: In a less regulated environment, there is a higher likelihood of
market manipulation and unfair practices. This can harm smaller investors and lead to
a loss of confidence in financial markets.
10. Inadequate Crisis Response: Deregulation can weaken the government’s ability to
respond effectively to financial crises or environmental disasters. Limited regulatory
tools and resources can hinder efforts to mitigate the negative effects of such events.
In summary, deregulation in the financial sector can lead to disruption and destructive
consequences because it can incentivize risky behaviour, reduce transparency and safeguards,
prioritize short-term gains over long-term stability, and weaken the ability to respond to crises.
These negative outcomes can extend beyond the financial sector and impact the broader
economy and the environment.
Lehman Brothers and Silicon Valley Bank are two distinct financial institutions that
encountered significant events, each with its own set of consequences, which are useful to
know for the introduction of this course:
1. Lehman Brothers:
- Event: Lehman Brothers was a prominent global financial services firm,
particularly known for its involvement in investment banking and trading. In
September 2008, Lehman Brothers filed for Chapter 11 bankruptcy, marking one
of the most significant moments of the global financial crisis.
- Consequences:
o Financial Crisis: Lehman Brothers’ bankruptcy had a domino effect on the
global financial system. It eroded confidence in the financial markets and
sparked a severe liquidity crisis.
o Market Turmoil: The bankruptcy sent shockwaves through global
financial markets, leading to a sharp decline in stock prices and causing
panic among investors.
o Credit Freeze: The Lehman Brothers bankruptcy contributed to a credit
freeze, making it extremely difficult for businesses and individuals to access
Page 2 of 106
, credit and financing, which had severe repercussions on the broader
economy.
o Government Intervention: In response to the crisis triggered by Lehman’s
bankruptcy, governments and central banks around the world took
unprecedented steps to stabilize the financial system. The U.S. government
initiated a massive bailout program, the Troubled Asset Relief Program
(TARP), to rescue troubled financial institutions.
o Economic Recession: The financial crisis that followed Lehman Brothers’
collapse led to a global recession. Many countries experienced economic
contractions, job losses, and housing market collapses.
2. Silicon Valley Bank:
- Event: Silicon Valley Bank is a commercial bank that primarily serves technology
and life sciences companies. It was not involved in the 2008 financial crisis or
Lehman Brothers’ downfall. Silicon Valley Bank continued its operations focused
on providing financial services to startups and tech companies during and after the
crisis. However, in 2023, Silicon Valley Bank succumbed to insolvency
precipitated by a bank run, thereby inscribing its name in the annals of United States
financial history as the third-largest bank failure.
- Consequences: The demise of this financial institution has engendered a palpable
erosion of faith in the United States’ capacity to sustain its preeminent stature in the
realms of technology and finance. This conspicuous diminishment in confidence
begets inquiries into the nation’s efficacy in preserving its hegemonic influence on
the global stage.
The primary role of the financial sector in an economy is to act as an intermediary between
those with excess funds (savers, investors) and those with a need for funds (borrowers,
individuals, businesses, and governments). This intermediation serves several essential
functions in an economy:
1. Allocation of Resources: The financial sector facilitates the efficient allocation of
resources by directing funds from individuals and entities with surplus capital to those
who can put it to productive use. This process ensures that funds flow to where they are
most needed, such as funding new business ventures, infrastructure projects, or research
and development.
2. Risk Management: Financial intermediaries, like banks and insurance companies, play
a critical role in managing and mitigating risks. They do this by pooling funds from
multiple sources and diversifying investments, reducing the impact of losses on
individual investors.
3. Liquidity Transformation: The financial sector transforms assets with varying
degrees of liquidity into assets that are more readily tradable. For example, banks take
in short-term deposits and use those funds to provide longer-term loans, making it easier
for individuals and businesses to access credit.
4. Payment Facilitation: Financial institutions provide payment and settlement systems
that enable the smooth exchange of goods and services. This is crucial for the
functioning of the broader economy.
Page 3 of 106
, 5. Information and Advice: The financial sector offers valuable information and advice
to investors and borrowers. Financial institutions and markets provide data, analysis,
and expertise to help individuals and businesses make informed financial decisions.
6. Economic Growth: By channelling savings into productive investments, the financial
sector contributes to economic growth and development. It enables businesses to
expand, innovate, and create jobs, thereby fostering overall prosperity.
7. Wealth Preservation and Growth: The financial sector offers various investment
opportunities that allow individuals to preserve and grow their wealth over time. This
includes options such as stocks, bonds, mutual funds, and retirement accounts.
8. Capital Formation: The financial sector aids in the formation of capital, which is
essential for funding large-scale projects, research, and infrastructure development.
This capital formation is a driving force behind economic progress.
9. Risk Transfer: Financial markets provide mechanisms for transferring risks, such as
insurance products and derivatives. This helps entities manage and mitigate financial
risks associated with unforeseen events.
10. Innovation and Entrepreneurship: By providing access to funding and capital
markets, the financial sector encourages innovation and entrepreneurship.
Entrepreneurs can secure the necessary funds to start or expand businesses and bring
new ideas to market.
In essence, the financial sector’s role as an intermediary is pivotal to the efficient functioning
of modern economies. It ensures that funds are channelled from savers to borrowers, supports
economic growth, manages risks, and fosters wealth creation, all of which are fundamental to
a thriving and dynamic economy.
What is financial regulation?
Financial regulation encompasses various sectors, including banking law, securities law, and
insurance law, which, despite their distinct operational mechanisms, share a common
overarching purpose. It is imperative to consider these sectors collectively, as their interplay
enables a comprehensive understanding of financial market dynamics, including associated
challenges. This essay posits the definition of financial regulation as follows: “The legal
framework governing financial markets, designed to optimize their functionality and achieve
predefined objectives.”
The primary function of financial markets lies in the efficient allocation of capital. They serve
as conduits through which private savings are directed towards industrial and commercial
investments, bridging the gap between surplus and deficit liquidity. This intermediation
extends beyond mere volume considerations, encompassing the aggregation of relatively small
sums (commonly referred to as ‘retail’) and their allocation in larger quantities.
Furthermore, financial markets also contribute to the creation of money. Central banks,
exemplified by entities such as the European Central Bank (ECB), possess the authority to
generate currency by purchasing bonds in exchange for monetary injections into the economy.
Central banks meticulously regulate the money supply through their bond acquisition activities.
Notably, commercial banks also play a pivotal role in money creation—a fact that may seem
counterintuitive to some. The foundation of this process lies in the concept of liabilities, which
represents a company’s sources of funding, typically comprising a blend of equity and debts.
Page 4 of 106
Course - Prof. dr. Colaert Veerle
Practical information
There is no prerequisite for this class, but it is linked with the “European Banking and
Investment Services law” courses.
Materials: PowerPoint presentation (Toledo), class notes, legislation, and case law (reader
available at cursusdienst), background materials (Toledo, not compulsory).
Assignments: FT articles or movie clips in Toledo to introduce you to a theme and eventually
spark the discussion.
Rules: you can’t write in your reader, except for post-it (only name of the regulation / rule),
highlighting, circling, underlining, or cross-referencing (“cf. X or Y”).
Exam: written exam, closed book (except for legislation and case low without annotations and
dictionary), +/- 4 essay-style questions (the number of lines indicates the expected length of
the answer: cf. PowerPoint for common types of questions), explain several concepts in two
lines…
Part 0 – Introduction
Deregulation within the financial sector engenders a milieu susceptible to disruption and, on
occasion, deleterious ramifications, a phenomenon grounded in various fundamental
rationales:
1. Risk-Taking Incentives: Deregulation often reduces government oversight and
constraints on financial institutions. This can create incentives for these institutions to
take on more risks, as they may believe they can operate with fewer consequences.
Increased risk-taking can lead to financial bubbles, market instability, and ultimately,
financial crises.
2. Lack of Transparency: Deregulation can reduce transparency in financial markets.
When there are fewer regulations requiring disclosure of financial information and
practices, it becomes harder for investors and regulators to monitor and assess the health
of financial institutions. This opacity can lead to market manipulation and fraud.
3. Inadequate Safeguards: Deregulation may weaken or eliminate safeguards that were
put in place to protect consumers and the environment. For example, in the context of
environmental disruption, deregulation may reduce environmental regulations and
enforcement, allowing industries to engage in practices that harm the environment
without sufficient oversight.
4. Short-Term Focus: In a deregulated environment, financial institutions may prioritize
short-term profits over long-term stability or sustainability. This can lead to a focus on
speculative trading, risky investments, and practices that prioritize immediate gains
without considering the potential long-term negative consequences.
Page 1 of 106
, 5. Systemic Risk: Deregulation can increase systemic risk, where the failure of one
institution or market participant can have cascading effects throughout the financial
system. The 2008 financial crisis is a stark example of how deregulation allowed the
buildup of systemic risk, leading to a global financial meltdown.
6. Environmental Consequences: In the context of environmental disruption,
deregulation can weaken environmental protections, allowing industries to exploit
natural resources without adequate consideration of the environmental impact. This can
lead to pollution, habitat destruction, and other negative environmental outcomes.
7. Lack of Accountability: Deregulation may reduce accountability for financial
institutions and other stakeholders. When regulations are lax or poorly enforced, it can
be difficult to hold individuals and organizations responsible for unethical or reckless
behaviour.
8. Uneven Distribution of Benefits and Costs: Deregulation can result in the unequal
distribution of benefits and costs. For example, financial institutions may profit greatly
from deregulation while the broader society bears the costs of financial crises or
environmental damage.
9. Market Manipulation: In a less regulated environment, there is a higher likelihood of
market manipulation and unfair practices. This can harm smaller investors and lead to
a loss of confidence in financial markets.
10. Inadequate Crisis Response: Deregulation can weaken the government’s ability to
respond effectively to financial crises or environmental disasters. Limited regulatory
tools and resources can hinder efforts to mitigate the negative effects of such events.
In summary, deregulation in the financial sector can lead to disruption and destructive
consequences because it can incentivize risky behaviour, reduce transparency and safeguards,
prioritize short-term gains over long-term stability, and weaken the ability to respond to crises.
These negative outcomes can extend beyond the financial sector and impact the broader
economy and the environment.
Lehman Brothers and Silicon Valley Bank are two distinct financial institutions that
encountered significant events, each with its own set of consequences, which are useful to
know for the introduction of this course:
1. Lehman Brothers:
- Event: Lehman Brothers was a prominent global financial services firm,
particularly known for its involvement in investment banking and trading. In
September 2008, Lehman Brothers filed for Chapter 11 bankruptcy, marking one
of the most significant moments of the global financial crisis.
- Consequences:
o Financial Crisis: Lehman Brothers’ bankruptcy had a domino effect on the
global financial system. It eroded confidence in the financial markets and
sparked a severe liquidity crisis.
o Market Turmoil: The bankruptcy sent shockwaves through global
financial markets, leading to a sharp decline in stock prices and causing
panic among investors.
o Credit Freeze: The Lehman Brothers bankruptcy contributed to a credit
freeze, making it extremely difficult for businesses and individuals to access
Page 2 of 106
, credit and financing, which had severe repercussions on the broader
economy.
o Government Intervention: In response to the crisis triggered by Lehman’s
bankruptcy, governments and central banks around the world took
unprecedented steps to stabilize the financial system. The U.S. government
initiated a massive bailout program, the Troubled Asset Relief Program
(TARP), to rescue troubled financial institutions.
o Economic Recession: The financial crisis that followed Lehman Brothers’
collapse led to a global recession. Many countries experienced economic
contractions, job losses, and housing market collapses.
2. Silicon Valley Bank:
- Event: Silicon Valley Bank is a commercial bank that primarily serves technology
and life sciences companies. It was not involved in the 2008 financial crisis or
Lehman Brothers’ downfall. Silicon Valley Bank continued its operations focused
on providing financial services to startups and tech companies during and after the
crisis. However, in 2023, Silicon Valley Bank succumbed to insolvency
precipitated by a bank run, thereby inscribing its name in the annals of United States
financial history as the third-largest bank failure.
- Consequences: The demise of this financial institution has engendered a palpable
erosion of faith in the United States’ capacity to sustain its preeminent stature in the
realms of technology and finance. This conspicuous diminishment in confidence
begets inquiries into the nation’s efficacy in preserving its hegemonic influence on
the global stage.
The primary role of the financial sector in an economy is to act as an intermediary between
those with excess funds (savers, investors) and those with a need for funds (borrowers,
individuals, businesses, and governments). This intermediation serves several essential
functions in an economy:
1. Allocation of Resources: The financial sector facilitates the efficient allocation of
resources by directing funds from individuals and entities with surplus capital to those
who can put it to productive use. This process ensures that funds flow to where they are
most needed, such as funding new business ventures, infrastructure projects, or research
and development.
2. Risk Management: Financial intermediaries, like banks and insurance companies, play
a critical role in managing and mitigating risks. They do this by pooling funds from
multiple sources and diversifying investments, reducing the impact of losses on
individual investors.
3. Liquidity Transformation: The financial sector transforms assets with varying
degrees of liquidity into assets that are more readily tradable. For example, banks take
in short-term deposits and use those funds to provide longer-term loans, making it easier
for individuals and businesses to access credit.
4. Payment Facilitation: Financial institutions provide payment and settlement systems
that enable the smooth exchange of goods and services. This is crucial for the
functioning of the broader economy.
Page 3 of 106
, 5. Information and Advice: The financial sector offers valuable information and advice
to investors and borrowers. Financial institutions and markets provide data, analysis,
and expertise to help individuals and businesses make informed financial decisions.
6. Economic Growth: By channelling savings into productive investments, the financial
sector contributes to economic growth and development. It enables businesses to
expand, innovate, and create jobs, thereby fostering overall prosperity.
7. Wealth Preservation and Growth: The financial sector offers various investment
opportunities that allow individuals to preserve and grow their wealth over time. This
includes options such as stocks, bonds, mutual funds, and retirement accounts.
8. Capital Formation: The financial sector aids in the formation of capital, which is
essential for funding large-scale projects, research, and infrastructure development.
This capital formation is a driving force behind economic progress.
9. Risk Transfer: Financial markets provide mechanisms for transferring risks, such as
insurance products and derivatives. This helps entities manage and mitigate financial
risks associated with unforeseen events.
10. Innovation and Entrepreneurship: By providing access to funding and capital
markets, the financial sector encourages innovation and entrepreneurship.
Entrepreneurs can secure the necessary funds to start or expand businesses and bring
new ideas to market.
In essence, the financial sector’s role as an intermediary is pivotal to the efficient functioning
of modern economies. It ensures that funds are channelled from savers to borrowers, supports
economic growth, manages risks, and fosters wealth creation, all of which are fundamental to
a thriving and dynamic economy.
What is financial regulation?
Financial regulation encompasses various sectors, including banking law, securities law, and
insurance law, which, despite their distinct operational mechanisms, share a common
overarching purpose. It is imperative to consider these sectors collectively, as their interplay
enables a comprehensive understanding of financial market dynamics, including associated
challenges. This essay posits the definition of financial regulation as follows: “The legal
framework governing financial markets, designed to optimize their functionality and achieve
predefined objectives.”
The primary function of financial markets lies in the efficient allocation of capital. They serve
as conduits through which private savings are directed towards industrial and commercial
investments, bridging the gap between surplus and deficit liquidity. This intermediation
extends beyond mere volume considerations, encompassing the aggregation of relatively small
sums (commonly referred to as ‘retail’) and their allocation in larger quantities.
Furthermore, financial markets also contribute to the creation of money. Central banks,
exemplified by entities such as the European Central Bank (ECB), possess the authority to
generate currency by purchasing bonds in exchange for monetary injections into the economy.
Central banks meticulously regulate the money supply through their bond acquisition activities.
Notably, commercial banks also play a pivotal role in money creation—a fact that may seem
counterintuitive to some. The foundation of this process lies in the concept of liabilities, which
represents a company’s sources of funding, typically comprising a blend of equity and debts.
Page 4 of 106
