The Value of Financial Market Insolvency Safe Harbours
- ↵*Assistant Professor, Department of Law, London School of Economics and Political Science (E-mail: p.paech{at}lse.ac.uk).
Abstract
‘Safe harbour’ is shorthand for a bundle of privileges in insolvency which are typically afforded to financial institutions. They are remotely comparable to security interests as they provide a financial institution with a considerably better position in insolvency. The common rationale for such safe harbours is that they protect against systemic risk. This paper submits that the true argument for the existence of safe harbours is rather liquidity in the financial market. Safe harbour rules do away with a number of legal concepts, notably those attached to traditional security, and thereby allow for the exponentiation of liquidity. The law sanctions safe harbours as modern economies are dependent on these high levels of liquidity. To the extent that safe harbours accelerate contagion in times of crisis, which in principle is a valid argument, specific regulation is well suited to correct this situation. To repeal or significantly restrict the safe harbours would be counterproductive.
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