Towards a Legal Theory of Finance

Award Winner: 
Winner of the 2014 Allen & Overy Law Prize (Best paper in the Law Working Paper series)

Towards a Legal Theory of Finance

Katharina Pistor

Series number :

Serial Number: 
196/2013

Date posted :

February 01 2013

Last revised :

February 26 2013
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This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts.

This is the case especially in times of financial crises when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival of the system is at stake; that is, at its core. Here, power becomes salient. This helps explain why finance is concentrated around ultimate lenders of last resort and why regulating finance’s core has become so elusive. It also holds lessons for future reforms.

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