Vincenzo Bavoso | The University of Manchester (original) (raw)

Papers by Vincenzo Bavoso

Italian Abstract: Negli ultimi venti anni la finanza é balzata al centro delle cronache giuridich... more Italian Abstract: Negli ultimi venti anni la finanza é balzata al centro delle cronache giuridiche, economiche e piú generalmente sociali. Si é assistito al tempo stesso, specialmente in seguito alla crisi globale del 2008, ad una rivisitazione delle strutture concettuali sulle quali si fonda l’apparato operativo della finanza globale. Ció nonostante, il suo modello operativo resta oggi incentrato sulla ricerca del profitto ad ogno costo, nel breve termine, spesso a scapito dell’economia reale, e di altre fasce sociali che con la finanza entrano in contatto. Questo articolo propone alcune considerazioni giuridico-regolamentari, attraverso un’analisi storica e filosofica di aspetti chiave dei rapporti creditizi. Si pone l’accento in particolare su come la finanza possa diventare strumento di sperequazione e prevaricazione, e su come risvolti storici di tali rapporti offrano lezioni importanti al riguardo, specialmente nella misura in cui la finanza ha rappresentato il veicolo attraverso il quale gli istinti umani piú aggressivi hanno trovato sfogo.

English Abstract: Over the past twenty years finance has taken the centre stage in legal, economic and social discourses. Notwithstanding reassessments of the financial system’s conceptual foundations following the global financial crisis of 2008, its operational model is largely unchanged. It remains rooted in the pursuit of short-term profits, ahead of real economy priorities and society’s welfare goals. This article tackles a number of legal and regulatory questions that are grounded on key historical and philosophical aspects of credit relationships. Emphasis is laid on the role of finance as an accelerator of social inequalities, particularly in light of its capacity to attract and channel the most perverse human instincts.

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report, 2015

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SSRN Electronic Journal, 2019

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SSRN Electronic Journal, 2016

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University of New York Journal of Law and Business (forthcoming), 2021

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Oxford Journal of Legal Studies (forthcoming), 2021

This article focuses on the rise of FinTech over the past ten years, particularly with respect to... more This article focuses on the rise of FinTech over the past ten years, particularly with respect to the role of technology-based platforms in the provision of credit. In this specific context, P2P lending has acquired an increasing importance, with a larger share of loans having been originated through P2P platforms instead of traditional banking channels. This trend has been welcomed by policy-makers as a move towards alternative market-based finance, which should contribute to better risk diversification by moving risks away from systemic financial institutions. At the same time, this shift presents a number of regulatory questions that have remained largely unexplored. This is so because the nature and role of P2P platforms has remained loosely defined, which means that it has been difficult to identify relevant regulatory challenges emerging from these channels of finance.
This research tackles two inter-related questions. First, it addresses the conceptual redefinition of financial intermediation. This allows understanding the function of P2P platforms, and whether they have supplemented the intermediation role traditionally conducted by banks. Second, it explores the risks that arise in connection with P2P lending channels. This second enquiry highlights outstanding policy and regulatory issues that have remained unexplored or downplayed in current debates.

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Law and Financial Markets Review (forthcoming), 2020

The Covid-19 pandemic and the subsequent worldwide economic slowdown have exposed the fragility o... more The Covid-19 pandemic and the subsequent worldwide economic slowdown have exposed the fragility of the financial sector, among others. This article argues that the seeds of this fragility, while being exposed by the pandemic, were sown earlier, in the post-2008 years, through the revived synergy of three elements of the financial system: private equity firms ascending the role of ultimate intermediaries in the system of private debt creation; leveraged loans becoming the new asset class that replaced what mortgages represented in the pre-2008 years; and collateralised loans obligations (CLOs) which in some ways replicated the function of CDOs as mechanisms of private debt creation. This article explains this phenomenon, analysing in particular how CLO structures morphed during the last decade and how this new transactional innovation facilitated a return to dangerous levels of leverage. As of 2019, the level of CLO issuance neared $120bn in the US, whereas in the EU they were close to Euro30bn. While the IMF warned at the end of 2019 about the dangers associated with the increasing levels of corporate leverage, confidence in the banking system was reiterated, largely due to the alleged safeness of CLOs, and particularly the capacity of these transactional structures to shift risks away from systemic banks. This article provides some clarity on these apparently contrasting statements, drawing inter alia some parallels with the crisis of 2008. 1 Senior Lecturer in Commercial Law, Law School, University of Manchester. Email for correspondence vincenzo.bavoso@manchester.ac.uk.

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Regulation and the global financial crisis: impact, regulatory responses, and beyond. Cash, D. & Goddard, R. (eds.). Routledge, 2020

Regulators and policy-makers have converged in recognising structured products as the engines tha... more Regulators and policy-makers have converged in recognising structured products as the engines that brought increasing instability in financial markets in the years before the 2008 global financial crisis. Innovations in structured finance, which culminated with the development of synthetic CDOs at the turn of the millennium, contributed to long and opaque channels of credit intermediation, and to the build-up of an uncontrolled level of leverage. Interestingly, in the pre-crisis years this area of finance law was not identified as one deserving regulatory intervention. This was so because of the undisputed reliance on neoclassical models of regulation, rooted in the assumption of arm's length contracting and the use of disclosure, which in turn were deemed sufficient to rein in the risks flowing from these products. The sentiments towards structured finance started to change around 2014, when policy-makers such as the IMF and IOSCO started blaming the near-death of securitisation as one of the reasons for the slow economic recovery in Western economies. The Bank of England and the European Central Bank started then to promote a revival of securitisation, grounded on a simpler and more transparent transactional approach. At the same time though, product intervention has become more popular with the powers allocated to ESMA to curb excessive risk-taking and prevent malpractice among market participants. This chapter looks ultimately at the balance between these regulatory powers and it assesses the extent to which complex structured products can still impair post-crises financial systems.

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Journal of Banking Regulation, 2019

The collapse of the global financial industry in 2008 and the subsequent decay of most Western ec... more The collapse of the global financial industry in 2008 and the subsequent decay of most Western economies into a period of prolonged economic stagnation have represented a springboard for the progressive growth of alternative channels of financial intermediation. The reluctance and inability of mainstream banks in the post-crisis years to provide credit facilities to the real economy, most critically to start-ups and small and medium-sized enterprises, propelled the latest wave of financial innovation, this time under the guise of FinTech. Much has been written on the rise of FinTech in recent years, but there is still insufficient clarity about the benefits that this phenomenon is bringing to the real economy and the potential risks that can arise from its growth. This paper maps the development of FinTech lending platforms in the UK and reconceptualises the rationale for their growth. In doing that, this study focuses on the structure and operation of the main UK platforms, recognising that while some are effectively banks that adopt a technology-based business model, many platforms operate under the P2P business model. The question then is to assess the policy and regulatory approach that is relevant to UK P2P platforms. Interestingly, the emergence of P2P securitisation raises a number of regulatory and policy questions, because longer intermediation chains typical of securitisation may well defy the social and economic purposes under which the idea of P2P developed. Furthermore, questions of systemic risk inevitably resurface in these types of transactions. Ensuing problems related to the best way to regulate these new channels of financial intermediation lead to critically evaluate the initiatives launched by the UK FCA, initially under the Innovation Hub, and more recently under the consultation for a new regulatory framework. Keywords P2P lending · FinTech · Financial intermediation · Market-based finance · P2P securitisation · Financial conduct authority · Credit risk · Systemic risk Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self-and general delusion

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Modern, globalised financial markets are the offspring of a process of liberalisation of capital ... more Modern, globalised financial markets are the offspring of a process of liberalisation of capital that started with the collapse of Bretton Woods in the 1970s and culminated with a number of regulatory changes in the 1980s and 1990s. As a consequence of that process, financial markets have grown dramatically and become increasingly integrated at a global level. Importantly, the growth and innovation that occurred over the past decade has taken place in the realm of capital market finance, and in particular in the context of market-based channels that revolved chiefly around securitisation and repo transactions. As a result, new debt transactions and products have been engineered since the 1980s. This article contends that, contrary to conventional belief, the excessive development of market-based channels of finance has been one of the catalysts behind the crises and scandals exploded over the past fifteen years. In particular, the employment of innovative debt transactions was instrumental to the creation of excessive levels of risk-taking and leverage. These had catastrophic consequence, both at firm level and at systemic level. Notwithstanding the regulatory measures that have been enacted over the past fifteen years, the way in which debt transactions in capital markets are designed and entered into remains lightly or indirectly regulated. Moreover , regulators have so far neglected the role that leverage and debt creation have in the economy and the consequence that these phenomena have on the wider social context. On the contrary, recently the EU has promoted the implementation of an old design, namely the Capital Markets Union (CMU). This revolves around market-based forms of financing, which should represent an alternative to the traditionally predominant (in Europe) bank-based financing channels. This article contends that the CMU framework fails to appreciate the dangers associated with capital markets finance and its ensuing debt creation effects. It argues that, despite some regulatory efforts, a suitable architecture for the regulation of market-based channels of finance is still missing.

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Contrary to conventional wisdom, this paper contends that the excessive development of capital ma... more Contrary to conventional wisdom, this paper contends that the excessive development of capital market finance has been one of the catalysts behind the crises and scandals that have unfolded over the past 15 years. In particular, innovative debt transactions have proved instrumental to the creation of excessive levels of risk-taking and leverage, which have had catastrophic consequences, both at the firm and systemic level.

While much regulation has been enacted in response to these crises, the way in which debt transactions in capital markets are designed and entered into remains largely unregulated. Moreover, regulators have so far neglected the role that leverage and debt creation play in the economy and their consequences for the wider social context. Moreover, the recent policy design in the EU is promoting a renewed implementation of an old design, the Capital Markets Union (CMU). This revolves around disintermediated, market-based forms of financing, which should represent an alternative to the traditionally predominant (in Europe) bank-based financing channel. This paper finds that the European policy design fails to appreciate the dangers associated with capital markets finance and its ensuing debt-creating effects. It argues that, despite some regulatory efforts, a suitable architecture for the regulation of disintermediated capital markets is still missing.

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The years preceding the wave of US corporate scandals at the turn of the century showed a high de... more The years preceding the wave of US corporate scandals at the turn of the century showed a high degree of convergence in corporate governance ideology and in its practice at the global level. The convergence corresponded with the perceived supremacy of the business model adopted in the US and UK based on shareholder value, on the growth of widely-held firms and the overall reliance on market mechanisms for the regulation of corporate governance. This convergence was due to a number of factors. These can be recognised firstly, with an intellectual dimension, which advanced the application of neoliberal principles in the area of corporate law and governance. This became particularly evident with the implementation of the Washington Consensus policies in areas of market liberalisation and corporate governance and with the direct influence on policymaking exerted by IMF and World Bank. Secondly, at a more practical level, the globalisation of Anglo-American legal, consulting and accounting services prompted the application of shareholder value to businesses in emerging economies, regardless of the underlying socioeconomic reality. The sequence of corporate and financial scandals that occurred over the past fifteen years contributed to stir academic debates over the validity of the shareholder value paradigm. Despite much criticism however, the business model centred on the pursuit of share value for the benefit of stockholders has remained the guiding criteria of corporate success. Moreover, neoliberal policies have extended beyond corporate governance, to fundamental areas of market regulation, disregarding relevant institutional factors typical of most emerging economies, such as underdeveloped financial markets or inadequate property rights. This has resulted in institutional arrangements whereby corporate activities have promoted the interests of one constituency – shareholders – ahead of other key social and economic concerns which have been left lacking adequate protection. In the context of emerging economies this problem is accentuated, because the privatisation of large utilities and natural resources companies has attracted foreign investors whose interests are not naturally aligned with local and environmental priorities. This chapter reconceptualises the critique of shareholder value in light of the specific context of emerging economies. It focuses on the necessity to take account of the different nature of large corporations that, due to the nature of their activities and externalities, affect the interests of a wide range of societal interests. The chapter proposes a new institutional framework for the specific regulation of the corporate objective of large public firms.

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The resurrection of the securitisation market lies at the heart of the recent EU project to build... more The resurrection of the securitisation market lies at the heart of the recent EU project to build a pan-European capital markets union (CMU). This is in line with the existing policy goal to expand market-based, disintermediated financing channels, which has been ongoing since the 1980s. Initial efforts to restart the moribund securitisation market in Europe have been carried out through a number of public consultations which have more recently converged towards the Commission’s proposal for a Regulation laying down the rules to create a European framework for Simple, Transparent and Standardised (STS) securitisation.
This article provides a critical perspective on the EU project to create a capital market union and in particular on the proposed framework for STS securitisation. The critique is firstly centred on the problematic coordination of the different policy objectives, which emerged from the consultations’ responses. Secondly, it points to four specific areas of concern, namely, the difficulty to define securitisation for the purpose of the regulation, the dangers of linkages with the shadow banking system, the unresolved reliance on external ratings, and the question of STS supervision.
It is argued in this article that the persistence of these problems in the current design leads to questioning whether a revived securitisation market would still fuel the shadow banking system and create systemic risks. It is pointed out that the difficulty to regulate complex legal relationships typical of long intermediation chains – such as tranched securitisation – make the proposed framework still weak. This article submits that only a tighter approach to transaction standardisation could ensure the simplicity and transparency that the Commission is hoping to achieve. Equally, a supervisory infrastructure centred on the overseeing power of a pan-European authority is needed to prevent pre-crisis legal problems from recurring.

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This article provides a critical review of the joint initiative undertaken by the Bank of England... more This article provides a critical review of the joint initiative undertaken by the Bank of England and the European Central Bank, to resuscitate the EU securitisation market in the wake of the global financial crisis. This article argues that, despite offering a valuable framework to define “good securitisation”, the BoE/ECB project lacks sufficient clarity on questions related to the necessary degree of standardisation, information disclosure and reliance on credit rating agencies. These problems contribute to questioning at a higher policy level whether securitisation will still fuel the shadow banking system and cause systemic risks.

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This article examines the legal structure of complex structured finance transactions – notably co... more This article examines the legal structure of complex structured finance transactions – notably collateralised debt obligation (CDO) – and explores in particular the regime of legal duties and liabilities designed to protect investors. The article critically assesses whether the existing law is adequate to hold to account the main actors involved in these transactions, namely SPV directors, trustees and asset managers. It also explores more specific avenues to establish accountability, namely the law of misrepresentation and fiduciary law. The analysis shows that in the context of structured transactions there remains an accountability problem due to the limited extent of the applicable duties, the nature of the conflicts of interest, the problematic disclosure (misrepresentation) of the transactions’ risks. The article contends that the complexity of the legal relationships underpinning CDOs and the resulting asymmetry of information between financial institutions on the one hand and investors on the other pushes for either a broader application of fiduciary obligations or alternatively a statutory redefinition of structured transactions.

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A number of questions remained unanswered with respect to the regulation of large financial insti... more A number of questions remained unanswered with respect to the regulation of large financial institutions after the global financial crisis (GFC) of 2007-08. Some pressing issues have resurfaced in the context of the recent interest rate swap scandals. These events provided the opportunity to reflect on the wider socio-political agenda that involves the regulation of banks’ behaviour vis-à-vis societal stakeholders. In particular, the IRS scandals have shown the ability that banks have to firstly, innovate and customise complex financial products, and secondly, limit their legal liability when selling them to investors. This has resulted in a highly unfair balance of powers between financial institutions on the one hand and regulators and financial consumers on the other.
The narrative of the scandals points to two fundamental enquiries: 1) It reconceptualises the process of financial innovation in light of the actors behind it and its purposes; 2) It appraises the prevailing culture permeating financial markets and whether regulation can impact on culture at all. This analysis prompts reflection on two policy issues: firstly, on the role of financial institutions in society; and secondly, on their powers vis-à-vis regulators and societal stakeholders. This article will argue that significant changes are still needed in order to cause the shift that would align financial institutions’ business towards sustainable and socially inclusive goals.
Policy Implications:
 The behaviour of banks should have regard to social priorities ahead of profit-making activities conducted in the interest of banks’ shareholders and executives;
 The desired behaviour of banks should be enshrined in statutory regulation;
 Regulatory changes should enhance the protection of financial consumers;
 The power of banks to innovate for speculative aims should be curtailed through more prescriptive regulation; this would inter alia curb the problem of information asymmetry in financial markets;
 The balance of powers in financial markets should be reconfigured together with the role of financial institutions in society;

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report, 2015

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SSRN Electronic Journal, 2019

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SSRN Electronic Journal, 2016

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University of New York Journal of Law and Business (forthcoming), 2021

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Oxford Journal of Legal Studies (forthcoming), 2021

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Law and Financial Markets Review (forthcoming), 2020

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Regulation and the global financial crisis: impact, regulatory responses, and beyond. Cash, D. & Goddard, R. (eds.). Routledge, 2020

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Journal of Banking Regulation, 2019

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"The explosion of the global financial crisis in 2007-08 reignited the urgency to reflect on the ... more "The explosion of the global financial crisis in 2007-08 reignited the urgency to reflect on the origins and causes of financial collapses. As the above events kick-started an economic meltdown that is still ongoing, comparisons with the Great Crash of 1929 started to abound. In particular, the externalities that a broad spectrum of societal groups had to bear as a consequence of various banking failures highlighted the necessity of a more inclusive and balanced regulation of firms whose activities impact on a wide range of stakeholders.
The book is centred on the proposal of a paradigm, the “enlightened sovereign control”, that provides a theoretical, institutional and substantive framework as a response to the legal issues analysed in the book. These stem primarily from the analysis of two sequences of events (the 2001-03 wave of “accounting frauds” and the 2007-08 global crisis) which represent the background upon which modern financial scandals are explained. This is done by highlighting a number of common denominators emerging from the case studies (Enron and Parmalat, Northern Rock and Lehman Brothers) which caused financial instability and scandals. The research is grounded on the initial recognition of theoretical themes in the field of corporate and financial law, which eventually link with the more practical events examined.
Through this multifaceted approach, the book contends that the occurrence of financial crises during the last decade is essentially rooted in two main problems: a corporate governance one, represented by the lack of effective control systems within large public firms; and a corporate finance one identified with the excesses of financial innovation and related abuses of capital market finance. Research conducted in this book ultimately seeks to contribute to current debates in the areas of corporate and financial law, through the proposals of the “enlightened sovereign control” paradigm.
"

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Abstract Negli ultimi venti anni la finanza é balzata al centro delle cronache giuridiche, econom... more Abstract
Negli ultimi venti anni la finanza é balzata al centro delle cronache giuridiche, economiche e piú generalmente sociali. Si é assistito al tempo stesso, specialmente in seguito alla crisi globale del 2008, ad una rivisitazione delle strutture concettuali sulle quali si fonda l’apparato operativo della finanza globale. Ció nonostante, il suo modello operativo resta oggi incentrato sulla ricerca del profitto ad ogno costo, nel breve termine, spesso a scapito dell’economia reale, e di altre fasce sociali che con la finanza entrano in contatto. Questo articolo propone alcune considerazioni giuridico-regolamentari, attraverso un’analisi storica e filosofica di aspetti chiave dei rapporti creditizi. Si pone l’accento in particolare su come la finanza possa diventare strumento di sperequazione e prevaricazione, e su come risvolti storici di tali rapporti offrano lezioni importanti al riguardo, specialmente nella misura in cui la finanza ha rappresentato il veicolo attraverso il quale gli istinti umani piú aggressivi hanno trovato sfogo.
Abstract
Over the past twenty years finance has taken the centre stage in legal, economic and social discourses. Notwithstanding reassessments of the financial system’s conceptual foundations following the global financial crisis of 2008, its operational model is largely unchanged. It remains rooted in the pursuit of short-term profits, ahead of real economy priorities and society’s welfare goals. This article tackles a number of legal and regulatory questions that are grounded on key historical and philosophical aspects of credit relationships. Emphasis is laid on the role of finance as an accelerator of social inequalities, particularly in light of its capacity to attract and channel the most perverse human instincts.

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Since the mid-2010s, with memories of the global financial crisis of 2008 (GFC) progressively fad... more Since the mid-2010s, with memories of the global financial crisis of 2008 (GFC) progressively fading, there has been increasing recognition of the potential contributions of market-based finance. This refers to credit intermediation conducted by non-bank entities, effectively what was termed in 2007 shadow banking. A number of policy-makers in the post-crisis years have praised the opportunity to reconcile shadow banking with resilient market-based channels of intermediation. The G30 in 2016 stressed particularly the potential that lies in securitisation and other forms of market-based finance. In the process though, market-based finance is also proposing the re-emergence of a business model that in the pre-crisis years was known as securitised banking.
The post-crisis narrative suggests that the regulatory corrections that have been implemented since 2008 should contribute to transforming shadow banking into resilient market-based finance. The Basel III framework sits at the heart of the post-crisis regulatory architecture, and it was designed to protect large financial institutions from the risks flowing from market-based channels of intermediation. This general optimism though clashed with the economic slowdown caused by the covid19 pandemic in the spring of 2020, particularly insofar as it exposed some deep-seated fragilities in the financial system.
This article therefore engages with a critical appraisal of that regulatory edifice, analysing in particular its capacity to respond to risks associated with pre-2008 securitised banking, as well as the challenges emerging from the more recent morphing in market-based channels of intermediation. The new Basel framework appears to provide the necessary safeguards to guarantee the stable operations of restored capital markets. This article observes though that despite providing much needed regulatory improvements from the pre-crisis regime, the current framework is still falling short in protecting the financial system from the risks that are generated by the evolution of market-based finance.

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Since the mid-2010s, with memories of the global financial crisis of 2008 (GFC) progressively fad... more Since the mid-2010s, with memories of the global financial crisis of 2008 (GFC) progressively fading, there has been increasing recognition of the potential contributions of market-based finance. This refers to credit intermediation conducted by non-bank entities, effectively what was termed in 2007 shadow banking. A number of policy-makers in the post-crisis years have praised the opportunity to reconcile shadow banking with resilient market-based channels of intermediation. The G30 in 2016 stressed particularly the potential that lies in securitisation and other forms of market-based finance. In the process though, market-based finance is also proposing the re-emergence of a business model that in the pre-crisis years was known as securitised banking. The post-crisis narrative suggests that the regulatory corrections that have been implemented since 2008 should contribute to transforming shadow banking into resilient market-based finance. The Basel III framework sits at the heart of the post-crisis regulatory architecture, and it was designed to protect large financial institutions from the risks flowing from market-based channels of intermediation. This general optimism though clashed with the economic slowdown caused by the covid19 pandemic in the spring of 2020, particularly insofar as it exposed some deep-seated fragilities in the financial system. This article therefore engages with a critical appraisal of that regulatory edifice, analysing in particular its capacity to respond to risks associated with pre-2008 securitised banking, as well as the challenges emerging from the more recent morphing in market-based channels of intermediation. The new Basel framework appears to provide the necessary safeguards to guarantee the stable operations of restored capital markets. This article observes though that despite providing much needed regulatory improvements from the pre-crisis regime, the current framework is still falling short in protecting the financial system from the risks that are generated by the evolution of market-based finance.

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This is a talk I gave in the Summer of 2019. It is a condensed summary of my thoughts on money th... more This is a talk I gave in the Summer of 2019. It is a condensed summary of my thoughts on money theory, focusing on the central problem that in my view impedes the advancement of a more socially desirable definition of money. In my view the main problem in this sense is the ancient and ever present conflation between credit instruments and means of exchange.

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This article is centred on the proposal of a new model of corporate decision-making: the enlighte... more This article is centred on the proposal of a new model of corporate decision-making: the enlightened sovereign control paradigm. In revisiting the long-standing academic debate on the corporate objective, typically enshrined in the dichotomy between shareholder value and stakeholder theory, a critique of these existing models is put forward. It questions in particular the ability of the existing theories to take account of the complex and multidimensional risks that are created by the company and affect different constituencies both inside and outside it. While the global financial crisis re-ignited the urgency to further define an appropriate legal framework for decision-making in large public firms, there have not been substantial changes in the way this problem is treated in legal and business circles. The paper is grounded on the recognition of the historical quest to find a legitimisation of corporate power and in particular to create a system of public accountability that could justify managerial decision-making. These tasks have become ever more central in the wake of the many scandals that exploded from the early 2000s to the present day, showing that many constituencies can suffer from the externalities of corporate activities. While much has been written on this topic, more recent events illustrate the need to find an alternative approach to the question of the corporate objective. This is because of its centrality in defining legal strategies to control managerial behaviour, but also because of the shortcomings of existing paradigms. The asserted urgency to find a new theoretical model to govern managerial actions and coordinate them with the interests of different corporate constituencies leads to the proposition of a new theory. The enlightened sovereign control paradigm flows from a pluralistic theoretical foundation and provides a novel legal and institutional framework for the balancing of different interests that are affected by the behaviour of large public corporations.

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Modern, globalised financial markets are the offspring of a process of liberalisation of capital ... more Modern, globalised financial markets are the offspring of a process of liberalisation of capital that started with the collapse of Bretton Woods in the 1970s and culminated with the deregulation policies of the late 1990s. As a result, financial markets have grown dramatically and become increasingly integrated at a global level. Much of the growth and innovation that occurred over the past decade has taken place in the realm of capital market finance, and in particular in the context of debt finance, where new transactional models and products have been engineered since the 1980s. This paper contends that, contrary to conventional belief, the excessive development of capital market finance has been one of the catalysts behind the crises and scandals exploded over the past fifteen years. In particular, the employment of innovative debt transactions was instrumental to the creation of excessive levels of risk-taking and leverage. These had catastrophic consequence, both at firm level and at systemic level. While much regulation has been enacted in the aftermath of crises and scandals over the past fifteen years, the way in which debt transactions in capital markets are designed and entered into remains largely unregulated. Moreover, regulators have so far neglected the role that leverage and debt creation have in the economy and the consequence that these phenomena have on the wider social context. On the contrary, the recent policy design in the EU is promoting a renewed implementation of an old design, the Capital Markets Union (CMU). This revolves around disintermediated, market-based forms of financing, which should represent an alternative to the traditionally predominant (in Europe) bank-based financing channel. This paper contends that the European policy design fails to appreciate the dangers associated with capital markets finance and its ensuing debt creation effects. It argues that, despite some regulatory efforts, a suitable architecture for the regulation of disintermediated capital markets is still missing.

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