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International Investment Law (Introduction)
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Lecture notes of 6 pages for the course at LJMU (Part 1B)
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International Investment Law1B
Banks originated in 1694 with the bank of England, back then you would find those that you
owed debt to
Collapse of city of Glasgow bank – biggest insolvency at the time, it was allowed to fail with
no bail out,
Financial stability
Explicit goal of EU capital adequacy regulation
o Directive 2013/36/EU capital requirements directive IV, recital 47 supervision of
institutions on a consolidated basis aims to protect the interests of depositors
and investors of institutions and to ensure the stability of the financial system
Explicit objective of us international needing supervision act of 1983
o 902 a (a) it is the policy of the congress to assure that the economic health and
stability of the United States and the other nations of the world shall not be
adversely affected or threatened in the future by imprudent lending practices or
inadequate supervision
Objective of UK’s financial policy committee
o Banking act 1998 S. 2A (as amended) – To protect and enhance the stability of
the financial system of the UK.
With politicians, the third option will never be undertaken, follow first and second onky.
What happens when banks fail
Negative externalities
o Contagion: failure of one firm can affect viability of others (Allen and Gale,
2001.)
o Severe contractions of the economy and increased levels of debt (Reinhart
and Rogoff, 2009) – this book compares previous financial crises. – uses less
borrowing
o Reduced efficiency of the credit allocation process and monitoring (Bernanke,
1983)
o Credit rationing (Stiglitz and Weiss, 1981)
o Disruption to the payments system (National banking era 1864-1914)
o Loss of savings (Cypriot crisis of 2012-13)
If royal bank of Scotland failed, everyone’s account would be frozen, bills or
mortgage payments would not come out, most had a business account, petrol
stations would run out of fuel
Unemployment rates will rise
, International Investment Law
Can there be too much finance?
Ninja loans – someone with no incomes, assets, or jobs, could get a loan from a bank
A concrete example
The financial crisis of 2007-09
The national audit office estimates the total UK taxpayer exposure to banking sector
losses at £955 billion
In the US, federal programs made up of lending and guarantee commitments to
various credit market participants was up to 7.7 trillion
After suffering a collapse in the financial sector, Ireland received an external
assistance package worth €67.5bn the assistance package was funded by the
European financial stability mechanism, the IMF, the European stability facility, and
bilateral loans (ICB, interim report, consultation on reform options (April 2011)
If there is non-independent currencies and the currency is shared, if another economy using
that currency collapses, the price of the euro for example shall collapse.
The fragility of banks
Banks conduct maturity transformation by financing long term assets with short term
liabilities (diamond and Dybvig, 1983)
A banks solvency can be threatened by a relatively small portion of its assets going bad, and
because of maturity mismatch between assets and liabilities, even a solvent bank can fail (in
the provision of liquidity from a lender of last resort) if there is a large-scale withdrawal of
deposits and other short-term funding
Interconnectedness: banks are connected to each other in important ways, the collapse of
one bank may cause one or more of its counterparties to fail, to the detriment of other
banks with which the counterparties also have dealing.
Case study: is Vw systemically important?
Had the largest accounting fraud due to emissions, they suffered the largest fine to date.
(€30bn.)
8% of German economy is the car industry. Therefore, it is interconnected.
Bank runs – a queue of people outside demanding money back
A run on a single bank can become a panic, a run on the banking system
Banks are interconnected, inter alia through the payment system
Depositors infer that if Bank A fails, bank BCDN which are owed money by it may
also suffer runs
Example of contagion: loss at bank. A multiplied throughout banking system
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