Financial Sector Assessment

Assessing the Legal Infrastructure for Financial Systems

The legal infrastructure plays a pivotal role in the operation of financial markets, as well as in the efficient intermediation of capital flows and domestic savings. Banks and other financial institutions hold claims on borrowers, the value of which depends on the cer­tainty of legal rights and the predictability and speed of their fair and impartial enforce­ment. The legal framework that empowers and governs the regulator and the rules for the regulation of the various markets form the cornerstone of the orderly existence and development of the financial markets. In this respect, the key laws are (a) the law govern­ing the formation and operation of the central bank and (b) the law regulating banking and financial institutions and markets.

The key components of an effective legal framework for the regulation and supervision of the financial system are laid out in various international standards for financial sector supervision and are discussed in chapter 5. In particular, the core principles of supervision relating to regulatory governance (box 5.1) explicitly cover the key legal underpinnings. In addition, the effective governance and operations of the regulator and the regulated also depend on the broader legal framework governing insolvency regime and creditor rights, financial safety nets, ownership, contracts, contract enforcement, accounting and auditing, disclosure, formation of trusts and asset securitization, and so forth. The assess­ment of the legal infrastructure encompasses both the sectoral and the broader compo­nents of the overall framework.