1. ETH Zurich, Spring 2015 Law & Business Transactions Law in Finance Gérard Hertig

2. I. Historical Perspective Financial systems arise to better exploit gains from trade First stage (3’000 BC – 1300 AD) – Mesopotamia  Means of payment and loans – Greeks/Romans  Money changers, deposit takers, mortgages – Fairs  Recording of claims and liabilities Second stage (1300 AD  1500 AD) – Northern Italy  Bills of exchange, insurance, accounting Third stage (1600 AD  1700 AD) – Amsterdam  Stock exchange – Sweden  Central Bank Fourth stage (1700 AD  ) – Stock market-oriented systems = Anglo-Saxon – Bank-oriented systems = Continental Europe 27.05.20152 History and Institutions / Law & Finance / Law in Finance

3. Institutions and Finance Economic exchanges are shaped by institutions – Combination of formal and informal ‘rules of the game’ – Complement contracts in allocating risk and value among economic actors  Quality of institutions explain economic growth  Institutions that form financial ‘rules of the game’    Political Legal Cultural (including social capital, ethics and religion)   27.05.20153 History and Institutions / Law & Finance / Law in Finance

4. Political Institutions Unconstrained autocracy – Undermines financial accumulation – Political and economic elites – Limits entry and competition Broadening political participation – Political power allocated to larger set of citizens – More savings, more credit Democracy – Bank-based systems  Civil law? – Market-based systems  Common law? – Varieties of capitalism and State intervention  Impact on competition  Impact on the role of legal institutions  27.05.20154 History and Institutions / Law & Finance / Law in Finance

5. Legal Institutions Law-making – Statutes: ‘Private’, ‘public’ & ‘criminal’ law – Case law: Leading cases vs. other cases – Self-regulation: Clarification, barrier to entry and window dressing functions Enforcement – Enforcement and compliance – Private enforcers, public officials, gatekeepers – Sanctions Importance of politics and culture – Capture and molding effects – Time-invariance of culture 27.05.20155 History and Institutions / Law & Finance / Law in Finance

6. II. The Law & Finance Movement 1.Moving from a dogmatic to a functional approach – Financial purpose / effect vs legal categories – Focus on transaction costs (coordination, drafting) and externalities vs focus on legal doctrines – Take better account of institutions 2.‘Relying’ on empirical analysis – ‘Complete’ dataset vs leading cases/major transactions – Using proxies and constructing indexes 3.Integrating behavioral finance 27.05.20156 History and Institutions / Law & Finance / Law in Finance

7. III. Current Role of Law in Finance Shift from relational to market-based finance Law remains central to modern finance – At the core of financial instruments – Lending authority to public and private instruments – Delegating powers to public or private regulators Financial markets are rule bound systems – Infrastructure – Contracts and liability 27.05.20157 History and Institutions / Law & Finance / Law in Finance