P345771/FC300

Module Code FC300

Class/Group MAY23FCF1
Module Title Extended Project
Assessment Type Written project
Project Title How do laws effect the financial stability of a country
Module Tutor Name Ms. Emma Buxton
Student ID Number p345771
Date of submission 06/03/2023

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I confirm that this assignment is my own work.

Where I have referred to academic sources, I have provided in-text citations and
included the sources in the final reference list.

As years went by and people started to foresee the importance of financial stability and
how it helps a country move forward, there has been ignorance to the role of law in preserving
and regulating those financial systems. As finances are seen to be very delicate when using, the
ultimate numbers in a country are very important in assessing the strength of a country’s
economy. There has been lots of cases where downing unlawful actions with finances could
destroy a corporation’s success, let alone destabilize the strength of finances held in a country.
Therefore, there had to be a regulation that stabilizes and coordinates the path of businesses
and economics in a country. They are made to control how people and institutions behave
inside the financial system and to guarantee the efficient operation of the economy. Since laws
and commandments set the path for balance and healthy supervision of a state’s functions, they
were considered the best option for regulating finances globally in the early 1900s. My claim is
that laws positively affect the financial stability of countries.

An article by Graff examines the relationship between the legal system and financial
stability in different countries. It compares the common law and civil law systems, and finds that
countries with a common law system tend to have more financial stability than those with a civil
law system. However, the article also notes that other factors, such as economic and political
conditions, can also play a role in financial stability. Overall, the study suggests that a well-
functioning legal system can help promote financial stability, but other factors should also be
considered. The article by Repiquet examines the relationship between EU law and financial
stability in the European Union. It argues that EU law has played a role in promoting financial
stability through the creation of regulations and supervisory bodies, such as the European
Banking Authority and the European Securities and Markets Authority. The article also suggests
that EU law has helped to harmonize financial regulations across member states, reducing the
risk of regulatory arbitrage and promoting stability. However, the article also notes that EU law
has its limitations and that other factors, such as economic conditions and the actions of
national governments, can also affect financial stability. the study advocates that EU law has
contributed to financial stability in the EU, but that other factors also need to be taken into
account. An article by Lopo-Pasini argues that financial stability is an increasingly important
issue in international law, as financial crises can have severe consequences for countries and
the global economy. The article suggests that international law has played a role in promoting
financial stability through the creation of international organizations and agreements, such as
the International Monetary Fund and the Basel Accords. However, the article also notes that
international law has its limitations and that other factors, such as economic conditions and the
actions of national governments, can also affect financial stability. international law is depicted
that it can play a role in promoting financial stability, but that it is not the only solution and that
other factors also need to be taken into account.

Maintaining the stability of the financial system depends on regulating the financial
sector. To control financial institution activity and mitigate systemic risk, the Dodd-Frank Wall
Street Reform and Consumer Protection Act was created in the US. They demand, among other
things, that banks maintain larger capital levels, go through stress testing, and establish risk
management procedures. By ensuring that financial institutions operate responsibly and

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prudently, these laws lessen the likelihood of financial disasters (United States Congress,
2010). Laws have an effect on how people and corporations behave in the financial system. For
instance, the issue and trading of securities like stocks and bonds are governed by securities
regulations. Companies must disclose information about their financial performance and offer
accurate and timely information to investors, according to these regulations. Investor decision-
making is aided by this transparency, which also lowers the possibility of fraud and market
manipulation. Consumer protection and transparency regulations control how financial
organizations interact with their clients. They make sure that clients receive fair treatment and
have access to truthful information about the financial services and products they utilize. By
encouraging prudent behavior in the financial industry, these rules lessen the chance of
financial disasters (Securities and Exchange Commission, 2021).

The stability of the financial system depends on effective financial markets. Antitrust laws and
other similar regulations seek to increase market competition and stop the misuse of market
dominance. This guarantees that the market remains effective and that customers can access a
variety of goods and services at reasonable costs. Moreover, regulations like bankruptcy laws
offer a framework for the legal resolution of monetary difficulties. This prevents the financial
system from being put at risk due to the failure of one institution spreading to other areas (Barth,
Caprio Jr, & Levine, 2013). Regulating the finances of a country limits the unlawful handling of
the market. There are both legal and illegal techniques to manipulate the financial market.
Insider trading, which happens when someone with insider knowledge of a company buys or
sells shares in order to profit, is one popular method of market manipulation. Market
manipulation, in which a person or group artificially inflates or deflates the price of a security or
market, is another method of market manipulation. This can be accomplished in a number of
ways, including by creating false rumors or influencing trading volume.

The Basel Accords and other international financial laws work to strengthen the stability of the
world financial system. To stop the spread of financial instability across borders, they impose
risk management procedures on banks and mandate that they maintain a certain level of
capital. Similar to how investment and trade regulations affect international money flows. These
regulations are meant to ensure that countries are not engaging in unfair trade practices like
dumping or protectionism and to level the playing field for enterprises. By encouraging
responsible behavior in the global financial system, these policies lessen the likelihood of
financial catastrophes (Financial Stability Board, 2011). Laws also have an effect on how the
economy and society interact. Policies like tax laws and social welfare legislation have an effect
on how money is distributed in society. They want to make sure that disadvantaged people are
shielded and that the advantages of economic expansion are fairly distributed. Environmental
regulations have a similar effect on how businesses behave within the financial system. They
want to encourage sustainable economic growth and stop the harmful side effects of economic
activity.

An article, written by the International Monetary Fund (IMF), discusses the role of law in
preserving financial stability. This article is assessed differently as it comes from an international
regulator, which makes it more reliable yet biased at the same time. It argues that well-
designed laws and regulations are crucial for maintaining the integrity and stability of financial
systems.it is suggested that laws that promote transparency, accountability, and market
discipline can help to limit the risk of financial crises. Laws that establish strong supervisory and
regulatory frameworks, and that provide for effective resolution of financial institutions in
distress, can also help to promote financial stability.Additionally, laws that protect consumers
and investors, and that promote fair competition, can help to prevent financial fraud and abuse,
and promote trust in the financial system.However, the article also notes that laws alone are not

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sufficient to preserve financial stability and that effective implementation, enforcement and
cooperation among regulators are also important. It also states that laws must be flexible
enough to adapt to changing circumstances and to take account of differences in the
institutional and regulatory frameworks across countries. There is emphasis on the importance
of well-designed laws and regulations in preserving financial stability, but also highlights that
laws should be implemented, enforced and adapted effectively and in cooperation with other
actors.

This article by Zegarra depicts a different aspect of this topic. It describes the
relationship between bank laws, economic growth and early banking in Latin America during the
period 1840-1920. The study finds that countries with stronger bank laws and regulations had
more stable banking systems and experienced stronger economic growth. The article suggests
that the laws and regulations helped to promote financial stability by protecting depositors and
investors, reducing the risk of bank failures and promoting confidence in the banking system.
The study also finds that countries with stronger bank laws and regulations were more likely to
attract foreign investment, which further contributed to economic growth. However, other factors
are noted to, such as economic conditions, political stability, and the actions of national
governments, can also affect financial stability and economic growth. Overall, the study
suggests that well-designed bank laws and regulations can play an important role in promoting
financial stability and economic growth in a country.

On the other hand, excessive regulation can be detrimental to a nation's financial

stability. A compliance burden brought on by excessive regulation may also take resources
away from useful operations. This could result in decreased investment and profitability in the
financial sector, which would ultimately affect the stability of the financial system (Bremus &
Fratzscher, 2015). Financial stability can also be harmed by regulations that are inconsistent or
conflicting. Confusion among financial institutions might result from inconsistencies between
several regulatory authorities or legislation. Increased compliance costs and decreased
investment in the financial sector may result from this (Cheng & Xiong, 2014). The stability of
the financial system can also be harmed by weak law enforcement. When there are no
repercussions for financial organization reckless or dishonest activity, it can create a moral
hazard and encourage other financial institutions to act similarly. As a result, there may be more
risk-taking and financial crises more frequently (Huang & Ratnovski, 2011). Financial stability
can also be harmed by political meddling in the financial sector. Politicians may be more
concerned with short-term political benefit than the long-term stability of the financial system
when they meddle in the market. This could result in decisions that encourage excessive risk-
taking or ineffective resource allocation, which would ultimately undermine the financial system's
ability to remain stable (Habermeier et al., 2013).

At last, the studies found through my research has concluded that laws do have a big
positive effect in preserving and regulating finances when enforced. These laws are rules that
protect consumers and investors, promote financial stability, level the playing field for financial
institutions, and support innovation in the sector. Regulations are essential for ensuring that the
financial system runs safely and soundly and that consumers and investors are protected, even
if they are occasionally perceived as a barrier to innovation. However, poorly designed or
implemented laws can also harm financial stability by increasing the cost of doing business,
creating uncertainty, and encouraging irresponsible or fraudulent behavior. Therefore, it is
important to design and implement laws and regulations that promote responsible behavior and
maintain the stability of the financial system. Without laws and regulations, fraud, market

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manipulation, and other criminal conduct would be far more likely to occur in the financial
system, potentially having very negative effects on the overall economy. The studies show
examples from different places across the globe and how each area got affected in its own way.
Yet, there was a lot of emphasis placed on the distinction between implementing a law and
regulating it, with the argument that this was the primary cause of the beneficial effects that
were measured by how well the financial markets performed in the years that followed.

- Graff, M. () Law and Finance: Common Law and Civil Law Countries Compared: An
Empirical Critique. Economica [online]. 75 (297), pp. 60-83. [Accessed 10 Nov 2022].
- Repiquet, M. (2019) Eu Law and Effective Regulation: A Step Towards Financial
Stability?. Maastricht Journal of European and Comparative Law [online]. 26 (6), p. 0.
[Accessed 14 Nov 2022].
- Lopo-pasini, F. (2017) Financial Stability in International Law. Melbourne Journal of
International Law [online]. 18 (1), pp. P.45-70. [Accessed 17 Nov 2022].
- Zegarra, L. (2014) Bank Laws, Economic Growth and Early Banking in Latin America:
1840–1920. Explorations in Economic History [online]. 53 (1), pp. P.101-119. [Accessed
19 Nov 2022]
- Hagan, S. and Leckow, R., 2023. The Role of Law in Preserving Financial
Stability. Insights and analysis on economics and finance, [Online]. 1, (0). Available
at: https://www.imf.org/en/Blogs/Articles/2016/07/01/the-role-of-law-in-preserving-
financial-stability [Accessed 3 January 2023].
- Barth, J. R., Caprio Jr, G., & Levine, R. (2013). Bank regulation and supervision: what
works best? Journal of Financial Intermediation, 22(4), 479-488.
- Financial Stability Board. (2011). Key Attributes of Effective Resolution Regimes for
Financial Institutions.
- Securities and Exchange Commission. (2021). Protecting Investors.
- United States Congress. (2010). Dodd-Frank Wall Street Reform and Consumer
Protection Act
- Bremus, F., & Fratzscher, M. (2015). Drivers of structural change in cross-border
banking since the global financial crisis. Journal of International Money and Finance, 52,
32-59.
- Cheng, I. H., & Xiong, W. (2014). The financialization of commodity markets. Annual
Review of Financial Economics, 6(1), 419-441.
- Habermeier, K., Cihák, M., Vávra, D., & Hesse, H. (2013). Political interference in
banking regulation: effects on banking risks and returns. Journal of Financial Stability,
9(4), 806-816.
- Huang, R., & Ratnovski, L. (2011). The dark side of bank wholesale funding.
International Monetary Fund.