Law on Trial: Can the EU regulate a financial crisis?

This post was contributed by Daniele D’Alvia, MPhil Law student in Birkbeck’s School of Law. Here, Daniele reports on the Law on Trial 2016 event held on Thursday 16 June: “Can the EU Regulate a Financial Crisis?”

This year, Law on Trial – the School of Law’s week-long programme of free-to-attend public lectures and panel discussions – focused on the EU referendum. The annual showcase brought together academic staff, recognised internationally as authorities in their field.

Law on Trial 2016

Law on Trial 2016

The 16th of June 2016 has been a landmark event for the 2016 ‘Law on Trial’ series of conferences. Indeed, the 4th day of ‘Law on Trial’ has been specifically dedicated to the role of financial law in Europe. The main question that Professor Michelle Everson has posed for the panel discussion, namely ‘Can the EU regulate a financial crisis?’ has shown to be a popular topic for the high interest that the audience has manifested during the event.

In particular, Prof. Ellen Vos (Maastricht University) illustrates the regulation and the role of European agencies. She reminds of the importance of delegating powers to agencies in the EU in order to regulate risk and uncertainty (for instance, risks in the environment, food, health and safety and specifically in relation to financial crisis). On this line Prof. Michelle Everson introduces the concepts of moral hazard, risk management and systemic risk. These terms are exceptionally important in the understanding of the current financial crisis and pave the way for the speech of the third guest speaker, namely the head of the compliance office of Wells Fargo, Patrick Devine.

He gives an outstanding presentation by pointing out how the current financial crisis is global in nature, but the solutions provided therein are local. For instance, think of the EU banking insolvency procedures there is not a universal bank insolvency law, because insolvency law is national in nature. To this end, the Single Resolution Mechanism in Europe is a first attempt to provide a uniform regulation of bank insolvency through the operation of the Single Resolution Board. He outlines that the credit-crunch that occurred in America in 2007-2008 was only the trigger, but not the cause of the current financial crisis. Indeed, he concludes that the cause of the current economic crisis is just inside the same economic system, namely capitalism.

This has always been the cause in his view and the legislative frameworks have only tried to regulate the trigger and not the environment in which triggers stand. Finally, Dr. Matthias Goldmann presents the idea of Karl Polanyi on the utopia of the ‘self-regulating market’. Indeed, in 1944 Polanyi wrote the ‘Great Transformation’, which divided between a society that uses markets as one valuable tool, and ‘market society’ that places everything on the auction block, even labour. Therefore, Dr. Matthias Goldmann argues that the idea of ‘market society’ has been one of the causes of the current financial crisis and he, therefore, provides a re-interpretation of the phenomenology of contemporary financial markets, where the market itself should play a more prominent role.

In the end, the panel discussion has been dominated by the conception of risk in financial crisis and how risk can be prevented or regulated.

The conception of risk and financial risk between economic theories and philosophical arguments

I would like to introduce here the concept of the ‘past qualification’ of risk based on a possible re-interpretation of Professor Frank Knight’s book ‘Risk, Uncertainty and Profit’, which has developed a philosophical argument on risk instead of a pure economic theory on profit. The book has always been recognised for its outstanding contribution towards a distinction between risk and uncertainty, namely between objective and subjective dimensions of risk towards a theorisation of insurable form of hazards and true uncertainties.

Prof. Knight’s theory of risk is part of the remarkable story on risk.[1] Indeed, according to Bernstein risk management is a revolutionary idea where far from being an antagonist, as the mysterious fate or the voluntas dei, the future has become an opportunity. The concept of risk-taking has been developed in Western countries from Fibonacci’s Liber Abaci (1202), Cardano’s Liber de Ludo Aleae (1525) and Galileo’s Sopra la Scoperta dei dadi (1623) through the laws of probability framed, inter alia, by Pascal and Fermat,[2] and in particular the science of statistics of Graunt, Petty and Halley,[3] promoting the concept of insurance as a commercial tool in the eighteenth century. In other words, the story of risk has initiated by formalising its ontological meaning based on an objective dimension.

This was a necessary conclusion because from an epistemological point of view the discourse on risk can be complex. Risk under this new light is the probability of occurrence of an event that may or may not occur, but risk is always a measurable uncertainty. In Prof. Knight’s words:

‘the practical difference between the two categories, risk and uncertainty, is that in the former the distribution of the outcome in a group of instances is known (either through calculation a priori or from statistics of past experience), while in the case of uncertainty this is not true (….) the best example of uncertainty is in connection with the exercise of judgement or the formation of those opinions as to the future course of the events, which opinions (and not scientific knowledge) actually guide most of our conduct’[4].

So, it is possible to state that the knowledge about risk is the knowledge of a knowledgeable situation. In other words, the ontological discourse on risk is representing what is knowable in principle or a priori by virtue of laws of probability and the science of statistics. It is knowledge of objective facts. For this reason, in my view the real revolutionary idea of Prof. Knight is the categorisation of risk on the past line.[5]

The practical effect of the ‘past qualification’ of risk in global financial markets

Now, the words of our guest speaker Mr. Patrick Devine are even more intelligible: in his view capitalism has always been the cause of the current financial crisis. In philosophical terms we could say that the past qualification of risk in its objective dimension has always been the cause of every financial crisis because simply it has always been there, but it has never been regulated. In Patrick Devine’s words: ‘we regulate the trigger of a crisis (we could say what has caused the uncertainty), but not the environment in which the triggers stand (we could say the real risk).

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Footnotes

[1] Bernstein (1996). Peter L. Bernstein (1996) Against the gods: the remarkable story of risk (John Wiley & Sons)

[2] Bernstein (1996) pp 57-72.

[3] Bernstein (1996), p 92.

[4]   Knight (2002), p 233.

[5] Knight expressly said that uncertainty is the formation of opinions as to the future course of events (i.e. a subjective belief).

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One thought on “Law on Trial: Can the EU regulate a financial crisis?

  1. We had everything in this series. From engaging talks from practitioners to worthless, convoluted gibberish (of the “economics supports the neoliberal agenda” kind).

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