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Law and Finance

In recent years, relations between law and economics have been the subject of numerous studies due to the realization of the importance of judicial frameworks that delimit, frame, and thus influence economic activities and their performance. This issue of the REF offers a summary of the analyses on how law influences finance. Several different aspects of the question have each been reviewed. First of all, competition and the use of the major judicial systems—civil law and common law—in a global universe. Next, the importance and the effects of the legal framework on financing for companies are analyzed both from the point of view of issuers and investors. Finally, another section deals with the impact of the judicial framework and its modes on financial stability or how legal rules can facilitate or try to facilitate a useful and harmonious development of finance for the good of the economy. These different analyses have been completed with an inventory of the most significant studies on the relationships between law, economics, and finance over the last twenty years.

The Review also contains an article on financial history devoted to sales of exotic securities by the Société Générale at the very beginning of the twentieth century. Finally, the issue includes two additional articles, the first dealing with the measurement of long-term performance of European banks, the second with the sustainability of the French national debt.

REF 129 Law and Finance

publication : May 2018 336 pages

Law and Finance

Introduction accès libre

Law, Finance and Globalisation

Globalisation and Regulatory Competition accès libre

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Among market participants, States, and even among regulators, there is constant tension over globalisation and regulation, over the regulation of risks and the search for innovation and competiveness, over regulation slanted towards the mastering of systemic risks of a global nature and regulation slanted towards the protection of the market and national players. With the aim of bringing a common set of responses to the weaknesses pinpointed, the post-crisis international regulatory framework, spurred notably by the G20, has been the source of undeniable progress achieved in reconciling globalization and regulatory competition.

However, new challenges are coming to light, on one hand linked to the emergence of an “America First” agenda which may make brittle the international consistency sought in past years, and on the other, to the departure from the EU of Europe's main financial market place. Europe must also find the means to strengthen its regulatory and supervisory frameworks in terms of efficiency, in order to favour supervisory convergence over regulatory detail.

Classification JEL : F02 F53 K33

Gérard Rameix

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Is the Discussion Common Law versus Civil Law on Economic Performance Relevant? accès libre

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Since their first publication in 2004, the successive Doing Business reports issued by the World Bank, premised a presumption of superiority of the common law over civil law in many aspects, have evolved such that their quantitative indicators of financial regulation no longer allows to differentiate the economic influence of one legal tradition from the other. The neutrality of the division between the common law and civil law systems on the economic performance of national regulations is also confirmed by other comparative instruments created by various organisations around the world, including in particular the Legal Certainty Indicator (Indicateur de sécurité juridique) of the Foundation for Continental Law. Historical, economic, linguistic and cultural considerations as well as the strategies deployed by States to promote their own system of law in emerging countries thus explain the predominance of the common law in international business law. The article shows that the competitive relationships between systems create a convergence by replication or adaptation of business legal instruments deemed to be efficient and provoke an evolution of national regulations for the standpoint of economic attractiveness. Other studies show otherwise that the major economic operators wriggle out of the jurisdiction of national courts to settle their business relationships.

Classification JEL : K15 K20 K33


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Law and Finance

Law, Financial Markets and Firms

Law, Public Offers and Restructurings accès libre

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French rules governing public offers have been amended frequently, sometimes reflecting the legislator's desire to encourage such transactions and sometimes reflecting a distrust of them. In the latter case, this is notably due to the restructurings that they can entail.

In view of these risks, the law of 29 March 2014 attempted to tighten the restrictions on restructurings contemplated in the context of takeover bids by increasing the powers of the board and of the works council. However, the actual scope of these new provisions needs to be qualified with regard to the restrictions they introduce. Conversely, foreign investment procedures, which may result in the investor having to give a certain number of commitments, appear to take on a much more important role in these transactions.

A distinction must be made between voluntary takeover bids on the one hand and mandatory bids and buyout offers on the other, as the rules governing them provide for different approaches to restructurings, in particular with regard to the AMF's discretion either to grant exemptions or to impose the filing of an offer. In order to limit so-called financial takeover bids, initiated notably by investment funds, France has opted for a high threshold, of 95%, triggering a squeeze-out.

Classification JEL : G18 K22

Didier Martin

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Blockchain and Financial Intermediation accès libre

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Blockchain is a technology that makes it possible to carry out and record orderly transactions in a digital format through a decentralized network without having recourse to a trusted third party. Trades are made safe by the use of encrypted algorithms. In this article, we study the impact of this innovation on the business of financial intermediation. We demonstrate that blockchains can reduce the costs associated with financial intermediation, leading to a change in the role of trusted third parties in financial transactions. However, regulation needs to provide a framework for its development in order to make trades more secure and to facilitate its adoption.

Classification JEL : D40 G01 G21 G23 O33

Marianne Verdier

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From Paper Securities to Digital Securities accès libre

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Financial assets are an increasingly important part of the wealth of economic agents. In the same way that the economy has followed technological change from an industrial economy to a service economy, the form in which securities are represented has changed drastically over the last fifty years, from paper securities to digital securities. However, the legal issues related to this transformation are not neutral since it is no less a question of determining the nature of the rights that the holders of these assets have over them. Whereas in their paper form the traditional legal analysis considered that the holders of these securities had a right of ownership, to what extent does their transformation into “dematerialised securities” and now into digital securities call into question this qualification?

Classification JEL : G28 K22

Hubert de Vauplane

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The Investors Perspective – Finance and Security Regime accès libre

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French law does not always understand and regulate appropriately circumstances in which large financings and related security interests are put in place. The rigidity imposed by French law on sophisticated market participants is regrettable. The economic efficiency of the security regime is impacted by its heterogeneous nature, in which in addition third parties receive an unsatisfactory level of information. A more homogenised registration regime should be envisaged if not more radically the creation of a single form of security interest for all movable assets. Further, French insolvency laws largely ignore secured creditor rights. The US system is radically different in some respects, while it too seeking to preserve the business as a going concern. Financiers will be keener to provide financing in a legal system which recognises the terms of their bargain. Uncertainty surrounding the efficiency of credit support increases the prudential costs of lenders and therefore financing costs. The forthcoming reforms of French security interest law and insolvency law will need to take this into account.

Classification JEL : G23 G28 K22

Étienne GENTIL

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Economic Analysis of Bankruptcy Laws: the Ten Major Functions of Insolvency Procedures accès libre

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This article proposes an original economic analysis of the bankruptcy systems prevailing in 20 countries (European and non-European ones). We identify ten major functions for insolvency procedures: accessibility, flexibility, insolvency costs, information, protection of the debtor's assets, protection of the claims, coordination, decision power, sanctions, orientation towards liquidation/reorganization. We suggest that the usual antagonisms between debtor-friendly vs. creditor-friendly systems, and/or regarding the origins of the legal systems (civil law vs. common law) are far too rough and superficial to drive the localization strategies of the foreign investors. Each insolvency system has specific strengths and weaknesses, which are straightforward to identify, and that vary from one category of stakeholders to the other.

Classification JEL : G33 K15 K22

Bertrand Chopard Régis BLAZY Afef BOUGHANMI Aziza LETAIEF

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The Legal Design of Financial Regulation

Judicial or Administrative Regulation of Finance? accès libre

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Ten years after the financial crisis, the “legal design” of the financial regulation has evolved. From an outside perspective, the change is hard to see; the players are the same: independent administrative authority and judicial authority contribute together to preserving market stability. But, on closer observation, the macro-prudential and international prism, which is now promoted, changes the nature of the missions of public authority; and the rise of the repressive aspect restores the position of the judge. National models of “regulation” are abandoned in favour of regional models of “supervision”. In Europe, the movement is evident but incomplete: choices of assignment and the co-ordination of procedures between public authorities and judges, between local and regional bodies, are uncertain. They need to be redefined in order to allow for the fluid synergy of the authorities, a prerequisite for the effectiveness of the system. The stake is not only that of market stability; faced with the threat that is posed, for European businesses, by the strong arm of US supervision comprising the SEC and DOJ, the challenge is also to provide Europe with the means to influence and protect the values on which it is founded.

Classification JEL : K22 K23 G18 G28


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Protection of the Consumer of Financial Products: the Role of Legal Redress accès libre

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This article examines the role of consumer redress, whether through courts or non-judiciary means, with respect to financial products and services aimed at non-professionals in the light of the regulations introduced over the last fifteen years. Redress complements direct regulation and constitute an ex post mechanism for monitoring products and services. As such, it is likely to possess an intrinsic cost advantage over ex ante monitoring in deterring undesirable behavior on the part of financial services providers.

Classification JEL : G28 K22 K41

Claude FLUET

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The Efficiency of Insider Trading Deterrence accès libre

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This article analyzes the repression of insider trading within the framework of deterrence theory (Polinsky and Shavell, 2007). The paper first considers the justification of the deterrence of insider trading, and then questions the modalities of deterrence. It contributes to the debate on the respective effectiveness of the deterrence of insider trading by an administrative authority or a criminal court. In addition, the article questions the impact of increasing the publicity on sanctions by the administrative authority. Communication can: reinforce deterrence by stigmatizing, inform market actors, and modify beliefs about the harmfulness of insider trading. However, stigma is a tool to be live handled with caution, due to: the underlying costs in terms of disutility of the stigma, the random nature of this cost, the rise in recidivism's probability and the negative effect on the reliability of information conveyed by sanctions when the standard of proof is weak (as it is generally the case for administrative authorities).

Classification JEL : G14 G18 K14 K22 K42


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Retail Investors in EU Securities Law: from Caveat Emptor to a High Level of Investor Protection accès libre

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This article summarises the arrangements in EU law regarding the protection of retail investors in the provision of investment services and their development in the past decades. The features of securities markets have led to move away from relying on the caveat emptor principle to much higher levels of investor protection. The recently introduced MIFID 2 legislation includes intrusive measures like product governance rules, and product intervention powers.

The cross-border nature of EU financial markets adds another complexity to the protection of retail investors and arrangements need to be in place to take sufficiently into account the interests of retail investors located in other jurisdictions. These arrangements are based on various tools available to ESMA to ensure supervisory convergence across the EU. ESMA has conducted various assessments of national supervisory practices which show still wide variation in practices across the EU and an overall modest level of enforcement activity.

Finally, this article briefly reflects on contract law, which also very much affects the level of retail investor protection. Progress in this area has been much less in terms of convergence, with persistent major differences across the EU. One such area of major differences concerns the opportunities for redress in case of retail investor detriment.

Classification JEL : K22 G28 G18


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The Financial Self-Regulation Limits accès libre

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We seek to demonstrate, by examining two recent cases why self-regulation generates
limits that lead some concerned players in finance to wish the passage of the
self-regulation to the regulation, accompanied by a supervision off the players and a device
of potential sanctions.
The first case is that of credit rating, where the self-regulation existing before the collapse
of Lehman Brothers clearly showed its limits and where a European and transatlantic
regulation was imposed, including a supervision for players.
The second case is more recent and evolving since it is the Initial Coin Offerings, where
self-regulation currently prevails but where the debate on the passage from self-regulation
to a Regulatory form is currently intense not only among players but within regulators.

Bernard Coupez

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Law and Finance: an Appraisal of the Legal Origins Theory accès libre

Financial History Chronicle

Société Générale's Exotic Securities (1914): the South-American Risk accès libre

Assessing the Sustainable Performance of European Banks: Towards an Integrated Reporting accès libre

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In this study, we define a Sustainable Performance Index (SPI) and apply it to twelve
major European banks for the period 2006-2014. We implement an original framework
based on a multi-attribute utility approach to assess the sustainable performance of these
banks including the economic, environmental and social dimensions.Wealso include the
opinion of six major stakeholders. The SPI allows the banks to define the strategy that
improve their action in terms of sustainability. It is used to identify the weaknesses and
strengths of a bank vis-à-vis its stakeholders and invites banks to consider the actions
needed to improve their satisfaction.
At the end of this study we come to the following conclusions: first, according to the
correlation analysis, our study shows the degree of sustainable performance of banks is in
the same direction as respecting the interests of their stakeholders. Then, the examination
of the indicators and criteria of SPI shows that the rise in SPI is mainly driven by the
improvement of stakeholders’ utility, particularly those of customers and regulators.
Finally, we understand clearly that sustainable performance is not related only to
traditional financial performance; it now includes social and environmental factors in
addition to the purely economic dimensions.


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The French Public Debt Sustainability 2017-2027 and the Rise of Interest Rates accès libre

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What efforts should be made to ensure the sustainability of the French public debt by 2027? The first part analyzes the French sovereign negotiable securities in terms of outstanding amounts, maturity and average coupon. These criteria examination highlights the factors of its sensitivity when the interest rates increase. The second part examines the expected Government cash-flows over the period 2017-2027 and its balance parameters according to its debt. The identification of debt securities allows to identify future funding sources based on assumptions about the Operating Public Budget, growth and inflation. The updated annual deficits generate new issuances which are analyzed in the light of how accompanying interests and redemption annual service. Both deteriorate financial equilibrium conditions. The article measures the efforts to be made in budgetary terms to ensure the sustainability of the debt within ten years, depending on whether the rates are stable or increasing.

Classification JEL : E43 E63 F34 G01 G18 H63 H68

Pierre Gruson

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