Over recent decades, the massive globalization of finance has led many observers to expect widespread harmonization of nations’ financial regulations. Yet, while there has been a remarkable degree of harmonization in some areas, at least at the regional level, considerable divergence persists.

In a new book, we explore why different jurisdictions converge or diverge in how they regulate finance. We develop an analytical framework to study the role of law in finance and how to approach financial regulation from a comparative perspective. For decades, the comparative approach to financial regulation was at the periphery of scholarship because harmonization was often plainly assumed while divergences were disregarded. However, the current environment characterized by geopolitical tension and increasing nationalism reveals the importance of differences in the regulation of global finance and of legal comparison to make sense of them.

The book does not cover every jurisdiction. Rather, it aims to provide the reader with the methodology to approach financial regulation comparatively. Therefore, we have collected contributions from worldwide experts in financial regulation, including scholars based in Europe, the UK, the United States, and Asia. We asked the contributors to compare different areas of financial regulation in different jurisdictions. Because reasonable people may differ on the functions of financial regulation, we have focused the analysis on one overarching question that we frame in the introductory chapter: What drives convergence and divergence of financial regulation?

At the heart of our approach stand market failures, which are endemic to finance regardless of whether financial intermediation is undertaken by banks or capital markets. We do not mean to overstate the distinction between these two segments of financial markets as we acknowledge that there are many and increasing overlaps – think, for instance, of securitization. However, in our opinion, the distinction between banking and capital markets remains important to analyze financial regulation and to make sense of the complexities stemming from the overlaps. Therefore, we focus our analysis on the key market failures in banking and in capital markets, respectively, (systemic) negative externalities and information asymmetries.

The key finding of the book is the identification of three main frictions preventing full harmonization and two main features prompting convergence. With regard to the frictions, we identify:

• the private law underpinnings of financial markets;
• the diverging policy objectives and regulatory goals; and
• and the varying structure of financial markets.

The main features prompting convergence are:

• the push by industry associations to reduce transaction costs, particularly in cross-border financial transactions such as derivatives;
• and policymakers’ concern with risk spillovers and potential race-to-the-bottom from regulatory arbitrage.

Based on these finding, we have categorized the drivers of convergence and divergence in four groups.

• the underlying national private laws, in particular property and contract law, provide the legal basis for financial contracts and for financial entities to carry out financial transactions. Similar private law institutions increase the likelihood of convergence and vice versa;
• the different policy goals pursued by different regulators or the use of different legal tools in pursuit of the same goals. One can expect divergence if one jurisdiction wants to favor innovation while another aims to safeguard investors and clients. Yet regulatory harmonization is clearly favored by global coordination on a specific policy goal, such as financial stability in the banking system;
• the different structure and degree of integration of financial markets that must be accounted for by financial regulators while pursuing their policy objectives. All else being equal, harmonization is less likely if one jurisdiction has a financial market relying heavily on the banking system vis-à-vis one in which capital markets are more developed; and
• regulators are exposed to a set of other, heterogeneous forces shaping their policymaking. This residual category is broad and relates to aspects not directly related to financial institutions or financial transaction. Policy responses to geopolitical risk represent the chief and most current example.

Departing from this intellectual framework, we have divided the regulatory analysis into two macro areas: Financial Markets (Part II); and Financial Institutions (Part III). Because financial innovation has blurred the distinction between banking and capital markets, we have collected the latest cross-cutting regulatory developments in Part IV (Frontiers), covering sustainability and cryptoassets. The three parts are preceded by Part I (Introduction), which includes our above-mentioned analytical framework, a historical analysis of convergence of financial regulation, and the comparative institutional architecture of financial regulation and supervision.

The relevance of this comparative exercise is manifold. To begin with, it helps the reader understand how policymakers’ preferences vary geographically and over time. For example, jurisdiction A’s stricter enforcement of banking regulation compared with jurisdiction B, or the adoption of a more stringent approach than in the past, often reflects distinct social, economic, and political choices. Moreover, the functional approach sheds light on the legal mechanisms and degree of harmonization needed to address emerging challenges for financial regulation, such as blockchain-based transactions or the increasing relevance of sustainable finance.

A key premise of the book is that the relationship between regulatory convergence and market efficiency, as well as financial stability, varies with time and between sectors. Therefore, our book does not seek to determine the optimal level of harmonization. We personally doubt that such an optimal level exists or can be determined. Rather, we aim to provide a hitchhiker’s guide to navigate the complexities of converging or diverging financial regulations.

This research handbook aims at a broad readership, including but not limited to policymakers, graduate students, and academics in law and in economics. A globe-spanning group of contributors, coupled with the functional approach, provides the reader with a broad overview of how financial regulation converges (or not) towards common standards in key jurisdictions. More importantly, the book provides the analytical tools to understand and interpret financial regulation from a comparative perspective, even in jurisdictions not directly covered. As this book is research-driven, we do not seek to provide definitive answers, but we do hope to frame the relevant questions.

This post comes to us from professors Edoardo Martino and Hossein Nabilou at the University of Amsterdam and Alessio Pacces at the University of Amsterdam and currently visiting Stanford Law School. It is based on their recent book, “Comparative Financial Regulation,” available here. A version of this post appeared on the Oxford Business Law Blog.