In this forward-thinking article, Professor Lastra examines the rationale of international regulation and discuss the inadequacy of the principle of sovereignty for the regulation of cross-border financial institutions. Then, after investigating the current coexistence of national laws and institutions and global financial markets, she considers the emerging lex financiers and debates the need for a World Financial Organization (WFO). The analysis starts with the broad observation that globalization has changed the traditional understanding of financial markets and has led to the emergence of multinational banks, financial groups and new instruments and markets that operate across jurisdictions. Globalization has magnified the impact and geographic outreach of systemic risk, and the globalization and liberalization of financial markets have proceeded at a much faster pace than the development of an appropriate international legal and institutional framework. What it has to be critically emphasized is that, despite the fact that the financial crisis was global, the solutions to the problems were in the main national. Paradoxically, when it comes to modern financial markets, sovereignty is an inadequate principle to deal with financial conglomerates, complex groups and, generally, with cross-border institutions and markets. Indeed, all these institutions transcend national boundaries, and so do financial stability and systemic risk. As a consequence, financial markets need to rely on different levels of governance (e.g., banking union in the EU is a recognition of this need at a regional level). Globalization has also challenged the traditional law-making process. The financial crisis exposed the limitations of relying upon a loose network of soft-law standard-setters and an inadequate system of resolution of financial crises. International financial regulation so far has proceeded through the harmonization route and has done so via soft law, and a so-called lex financier (similar to lex mercatoria in trade law) has slowly become to emerge. The key question at this point is: do we need a world finance organization (WFO)? The debate about the need for a WFO is based on the premise that our times need a new order. As the Author points out, in the finance domain there is ‘black hole’ with few formal international rules and no adequate system to deal with cross-border crisis or conflicts. Why this ‘black hole’? This is due – on the one hand - to the belief that financial markets are best left to their own devices and that therefore soft law was sufficient, and also – to the other one - to the reticence that nation states have to make the sacrifices that are needed in terms of national sovereignty to agree upon international solutions. In order to address the challenges of our times, there is need to design an appropriate international institutional framework. A global banking and financial system require some binding international rules (regulation), efficient supervision or surveillance, and an international system for the resolution of conflicts and crises. These are the functions for which we need a WFO. As a conclusion, the International Monetary Fund seems to be the best-suited to perform this function, as it is the aptest, in the international scenario, to exercise supervision (both at a micro and macro level) and to gather information through its surveillance function.
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