IV. Selecting Structural Features in International Law and Organization

The above analysis suggests a number of areas in which international law might be useful to establish cooperative solutions to regulatory problems. There are a number of parameters of choice in connection with the structuring of international law and organization. This section is intended to review some ofthe basic issues and describe some of the existing organizations that address the regulation of finance.[1]

A. Hard law, soft law and networks

There are many who believe that soft law is the best tool for international financial regulatory cooperation.[2] By ‘soft law’, many refer to rules that are specifically made non-binding in formal terms. However, soft law can only be appropriate where its net benefits after costs exceed those of hard law. We would expect this to be the case where soft law can be legislated with sufficient coverage, and where there are sufficient reputational or retaliatory tools available to generate a sufficient degree of compliance.

As to the question of the ability to generate a sufficient degree of compliance, we would have to assess the magnitude of possible incentives to defect in comparison to the magnitude of incentives to comply. There certainly may be circumstances where soft law would do the trick. Networks of regulators with diffuse reciprocity and temporally linked reciprocity may provide powerful incentives. But we would also expect to be able to identify circumstances where the incentives to defect are great enough to overcome the incentives to comply—for example, in circumstances where by doing so a state can ring-fence a sufficient portion of a failed financial institution’s assets to be able to avoid a political disaster at home. It is likely that ‘hard’ or formal law would carry greater incentives to comply, placing the integrity of the legal system at stake. Furthermore, with formal law, it is more natural to be able to establish formal penalties, and of course the remedies under the customary international law rules of state responsibility would operate by default.

  • [1] For a useful extended analysis, see Eric J. Pan, ‘Challenge of International Cooperation andInstitutional Design in Financial Supervisions: Beyond Transnational Networks’, Cardozo WorkingPaper No 300, April 2010.
  • [2] See Chris Brummer’s contribution to this volume at Chapter 5, as well as his broader work.
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