The power of financial innovations to impact societies at global scales compels us to ask how innovation occurs, how it is governed and how to support the responsible initiation and emergence of such innovation in society. This thesis focuses on investigating and comparing current approaches to, and limitations of, the governance of financial innovation and perceptions of responsible financial innovation in three very different institutional settings: a large, global asset management company; a SME developing disruptive, technology - related platforms and services based on big data and associated analytics supporting customer relationship management in the banking and retail sectors; and a global insurance broker. To date there has been almost no published empirical research into the processes and governance of financial innovation in such corporate settings. The initial hypothesis that financial innovation is not governed (internally, externally) was not supported by the empirical data: rather these suggest the existence of formal and informal mechanisms for innovation governance. As suggested in the literature, financial innovation was observed to be largely incremental in nature and involve multiple stakeholders, co-ordinated internally by an ‘innovation owner’ (e.g. an individual, a group of individuals or a department). The research suggests that while there is broad statutory (regulation) and non-statutory governance of the financial sector, there is limited direct regulation of financial innovation per se. Despite this, contextual regulation (e.g. EU) and industry standards set an important governance frame within which innovation was observed to occur, complemented by a range of organizational innovation governance approaches, which ranged from completely informal, ad hoc (‘de facto’) processes to formal staging innovation management tools. It was not possible to generalize across sectors, emphasizing the need for more empirical work in other organizations in order to understand innovation management and governance across the financial sector as a whole. Responsible financial innovation is an emerging concept associated with a very small body of academic literature. The case study data show responsible financial innovation to be perceived as an ‘interpretively flexible umbrella’ term, underpinned by a value system that leads to quantifiable positive outputs (e.g. creating customer satisfaction). The research suggests that several ‘competencies’ (e.g. compliance, learning, communication, monitoring, and ownership) were perceived as relevant to responsible financial innovation by respondents. Themes emerging from the study mirrored to some extent the seven framings suggested by Armstrong et al. (2012) and Muniesa and Lenglet (2012) and the four dimensions of responsible innovation proposed by Owen et al. (2013); these however were very narrowly framed, especially with regard to second-order reflexivity (e.g. on the normative purposes and functions of finance in society). While dimensions of anticipation, reflection, deliberation and responsiveness (Owen et al., 2013) were evident to varying degrees in the cases these were narrowly configured (e.g. around ethics of data monetization, or on anticipation of operational risks), with deliberation often being internally focused, or including only a limited range of external stakeholders. These observations cause me to argue that current mechanisms for governing financial innovation are not sufficiently robust to support their responsible emergence in society. I conclude that any framework for responsible financial innovation should endeavor to broaden the scope for stakeholder engagement and make use of multi-level governance mechanisms (including committees in the innovation and governance process), while continuing to acknowledge the importance of contextual legislation in the framing of innovation trajectories. I recommend the initiation of a cross sector and independent institution for systematic financial innovations assessment, the establishment of formal cross-sector fora and communication channels to facilitate engagement with external stakeholders, and the codification of responsible financial innovation competencies into contextual legislation.

Short selling came onto the centre stage during the recent financial crisis when the collapse in price of financial listed securities after the demise of Lehman Brothers led to the introduction of a number of temporary short selling bans. In Europe however it was the commencement of the recent European sovereign debt crisis that was the true stimulus for proposing new short selling rules, the culmination of which was the introduction of the European Short Selling Regulation (the 'Regulation'). The thesis asks whether the Regulation is a justifiable response to the concerns posed by short selling. Such issues are measured against the relevant economic literature that almost overwhelmingly demonstrates that short selling contributes to market efficiency, that restrictions generally make markets less efficient and that constraints do not achieve the desired objective of stabilising prices. The thesis then analyses the political economy and backdrop to the Regulation’s introduction that largely dictated the shape of the final rules. The precise legislative choices made by Europe, including with respect to sovereign credit default swaps, are analysed, and (where relevant) there is a comparative element with a consideration of the US short sale regulations. These rules are used as a contrast and as a means of commenting more effectively on the European provisions. The doctorate concludes that the Regulation is not a justifiable response to policymakers' concerns and that the rules have suffered from the politicisation of the legislative process. The thesis suggests that short-term political point scoring has triumphed over the long-term benefits of market efficiency and that short sellers are now the subjects of highly technical rules that will negatively impair on market efficiency. Although, with time, parties may learn to use the new rules to their advantage, this does not justify the introduction of unreasonable rules in the first place.

This paper analyzes the causes of financial crises, and on this basis it proposes possible changes in financial regulation. Throughout the paper we work with a hypothesis that the major roots of financial distress are excess credit growth and substantial capital inflows. We test this hypothesis on a dataset comprising entries from Australia, Japan, the UK, and US over the approximate period 1970-2010. The results confirm that there is a consistent relation of credit development to financial crisis incidences and a somewhat less consistent effect of capital inflows. Furthermore, since we find a robust positive effect of past credit growth on the probability of a crisis occurrence, we propose a change in interest rate policy. Our suggestion implies a consideration of credit to GDP ratio during the execution of the monetary policy decisions on interest rates.

My dissertation thesis provides a comprehensive analysis of the principles of securitization techniques, of their attendant shortcomings, their regulatory treatment and the recent proposals for reducing complexity in accounting standards with relevance for securitizations. The explosion of securitization and related innovative credit risk transfer products largely expanded the magnitude and diversity of issuers, investors and securities. With this expansion numerous market participants began to wrongly believe that risk was not only shared more widely, but also that it disappeared from the system altogether. The application, or to be more precise, the misapplication of securitization in the mortgage market had fatal consequences for the financial sector worldwide. Before securitization, sub-prime mortgage lenders retained the loans that they originated on their balance sheets and therefore cared about their credit quality. Securitization techniques and related innovative financial instruments enabled the export of sub-prime mortgage structural problems from the United States globe-wide via the financial intermediaries. More over, securitization techniques and related credit risk transfer products enabled single banks to reduce their individual risk while at the same time transferred new and greater risks to the financial system. Meanwhile a lot was written on the causes for the recent financial crisis. In most cases inadequate ratings provided by the credit rating agencies and different principal agent problems were addressed. I present both for completeness in my work. However, I argue that not only the credit rating agencies are to blame for the inadequate reflection of securitization and related financial innovations and subsequently for the financial turmoil. The international and national financial supervisors in fact supported the credit rating agencies to further establish their businesses. What turned obvious during and after the financial turmoil started mid-2007 is that financial regulation failed to reach its main goal - ensuring stability of the financial system. It failed despite of the "regulatory achievements within Basel II" elaborated over the past ten years. In particular, securitization and related credit risk transfer products were not adequately treated in Basel II. Securitization-related products such as Credit Derivatives on Securitization Underlyings and numerous other complex financial innovations, as presented in my thesis, were not even thought of in Basel II. In fact, Basel II turned to do little to make the financial system more resilient. The need for further revisions in banking regulation is currently more than obvious. Furthermore, it is time to ask if the developments in Basel II are the right way to address the current risks within the financial system and hence if Basel II is the right way of banking regulation and supervision altogether. With the development of both Basel Accords (Basel I and Basel II) capital ratios became the center of banking regulation. However, capital ratios are obviously not sufficient as a measure for a systemic financial stability. These questions arise at least when financial stability and soundness are still the intended objectives and believed to be ensured through Basel II. My merits in this dissertation work root in the multi-facet analysis of securitization techniques that I provide. Up to date a comparable analysis of securitization techniques which addresses the wide spectrum of securitizations' issues - such as (i) their treatment and the related attendant flaws within the regulatory framework Basel II, (ii) the various microeconomic deficiencies related to securitizations, and (iii) the implicit macroeconomic threads of exporting credit risk and de-balancing financial stability through securitization techniques - has not been provided in the comprehensive way I built up my analysis. As a basis for my analysis, I provide a new classification of the characteristics of securitization techniques which were pre-crisis wrongly perceived as benefits. I analyze the reasons for the turmoil in the financial markets in their interplay and complexity and consider securitization techniques as a key driver for the financial crisis. I comprehensively criticize the current regulatory treatment. I present in detail why the recent financial crisis should be considered a clear regulatory failure due to the up to date short-sightedness of financial regulation. Through providing partial solutions and professional author's assessment of selected regulatory and accounting changes to securitizations I deliver an expert's contribution to the topic. My conclusions are that securitization markets, as they have been operating until today, brought a negative net macroeconomic effect which has been largely damaging to the global economy. I argue that international and national financial supervisors established an inadequate framework for financial regulation and supervision, and among other failures, even supported credit rating agencies to further establish their businesses. Further on, I show that early warning indicators of systemic risk in the financial sector and signs of the coming turmoil were irresponsibly ignored at the time they were perceived. What turned obvious during and after the recent financial turmoil is that capital regulation failed to reach its main goal -- ensuring stability of the financial system. In particular, securitization and related credit risk transfer products were adequately treated neither in Basel I nor in Basel II. Finally, I conclude that capital ratios as established with the development of both Basel Accords are not sufficient as a central measure for banking regulation and ensuring systemic financial stability.

The authors analyze the reasons for the establishment of a regulatory regime for international financial markets in accordance with the ideas of liberal internationalism. They argue that the system of international markets is affected by polymorphy, indicating the existence of different forms of regulation. Five factors produce this polymorphy: the non-existence of a homogenous object of steering, the dynamic nature of these objects, the fact that the purpose of governance is not clearly defined, the dominance of governance by the USA and Great Britain, and governance as a result of a multi-level game with various coalitions.

This article analyzes to what extend new knowledge and ignorance-structures within financial markets challenge basic assumptions in scientific discourse. ‘Ignorance’ is seen as an inherent part of governance-regimes. It is argued that the self-fulfilling prophecy of a bank run as the dominant metaphor for systemic risks is insufficient to capture today’s dynamics and categorical changes. Therefore, the paper seeks to show that ‘science’ has not sufficiently attempted to fully come to terms with issues of uncertainty and self-reference.

The audit firms play an important role in the capital markets by verifying that auditors provide reliable information to the decision makers. However, trust in auditing firms has been questioned following Enron‘s failure and accounting scandals at WorldCom and other companies. As a result, Arthur Anderson failed and the number of big audit firms fell to four firms and no one knows who might be next. Defond and Francis (2005) believe that a critical trigger occurred when Deloitte & Touch issued a “clean” peer review report on Arthur Andersen in December 2001, just a few weeks before Andersen publicly announced that it had shredded documents related to Enron audit. The credibility and integrity of the profession‘s self-regulation program was immediately in doubt. To protect public interests and to restore confidence in the capital markets, the USA government issued the Sarbanes-Oxley Act (SOX) in 2002. Similarly, the Financial Reporting Council in the UK provided the Professional Oversight Board with similar mission. This thesis aims to explore the role of independent audit regulators in promoting confidence in the audit profession, and analyse the big four firms’ strategies that react toward these regulatory changes in the audit markets. The lack of studies in this area supports the use of grounded theory as a research methodology. 24 semi-structured interviews were conducted with the top management level of the audit regulators and big four firms’ partners. This study contributes to the literature as it provides a better understanding of the satisfaction of the big four audit firms toward the new independent regulators, and how these firms react toward the additional requirements of the independent inspectors.

Off balance sheet financing (OBF) is either not visible or only partially visible in financial reporting for a number of reasons. It has attracted controversy in the light of its employment in a number of major corporate scandals. Previous investigations dominated by short works and consultancy papers have focused mainly on the financial aspects of OBF. This academic cross-country research on the use of OBF in the UK and US capital markets was undertaken to extend the published analyses to include a legal perspective by studying its legal implications for directors, financial advisers, auditors and financial regulators. The study’s legal focus prompted relying primarily on the doctrinal approach, which was in turn completed by the use of a modified case study in order to help address the how and why issues of the research phenomenon. The study found that OBF instruments are double-edge financial instruments with good and bad consequences. When corporations used OBF for liquidity enhancement or to realise financial savings, they result in positive outcomes. In contrast, when used for aggressive window-dressing or in the manipulation of financial reporting for fraudulent ends, OBF mechanisms generated serious legal liabilities for directors, auditors, and financial advisers in terms of compensation suits or even criminal sanctions. Financial regulators were nonetheless found to be less likely to face legal consequences as a result of current judicial attitudes on the tort of public misfeasance. However, the extensive applications of OBF in conjunction with other forms of creative accounting have resulted in various regulatory responses. On a comparative note, litigation and enforcement actions were found to be relatively more extensive in the US because of the higher incidence of large corporate frauds and the work of regulatory champions especially in New York using deferred prosecution agreements.

Le régulateur des marchés financiers, en réponse à l'augmentation progressive de ses pouvoirs de sanction, s'est vu enfermé dans un carcan procédural si étroit qu'il risque à terme d'en paralyser le fonctionnement. Cette thèse vise à démontrer comment le couple formé par l'AMF et l'autorité judiciaire se complète pour animer le système français de régulation des marchés financiers. La première partie détaille l'évolution historique de la régulation française qui a vu ses régulateurs successifs étendre leurs champs de pouvoirs, de sanction notamment. Pour légitimer ses nouvelles attributions quasi juridictionnelles le régulateur a été contraint de se voir doté d'un socle procédural de droit commun, qu'il partage avec les juridictions qui sous certains aspects semblent avoir absorbé sa fonction régulatrice des marchés financiers, ramenant l'AMF à un rôle d'auxiliaire de justice. La seconde partie montre que le contrôle judiciaire des décisions de l'AM F tient néanmoins compte de la spécificité de sa mission, adoptant une vision globale des différents niveaux de régulation, au risque parfois de perdre en sécurité juridique pourtant attendue par les acteurs des marchés financier. En effet, le juge participant à l'œuvre générale de régulation aux cotés de l'AMF, se voit doté d'un pouvoir quasi régulationnel. Pour que l'AMF réintègre pleinement sa fonction régulatrice qui fait sa raison d'être nous plaiderons pour un renforcement de ses pouvoirs spécifiques. / The regulator of financial markets, in response to a gradual increase in its powers of sanction was locked in a narrow procedural system that could eventually paralyze the regulator. This thesis aims to demonstrate how the couple formed by the AMF and the judiciary is completed to animate the French system of regulation of financial markets. The first part describes the historical evolution of the French regulation which has seen successive regulators expand their fields of power, including sanctions .To legitimize his new quasi-judicial functions the regulator was forced to be with a procedural basis of common law , which it shares with the courts which in some ways seem to have absorbed its regulatory function of financial markets, reducing the AMF to a judicial officer state. The second part shows that the judicial review of decisions of the AMF take nevertheless into account the specificity of its mission, taking a holistic view of the different levels of regulation ,sometimes at the risk of losing in legal certainty yet expected by the actors in the financial markets. Indeed, the judge involved in the overall implementation of regulation with AMF, is seen with a quasi regulationnal power. For the AMF fully reinstated its regulatory function that motivated its creation we plead for a strengthening of its specific powers.

This thesis consists of three chapters on macroeconomics and international economics. The first studies the effectiveness of macroprudential policies in a New Keynesian dynamic stochastic general equilibrium framework with financial frictions. Profit-maximizing banks with endogenous leverage ratio expand credit lending during economic booms and become increasingly vulnerable to unanticipated economic shocks. Countercyclical macroprudential instruments are found to be effective in dampening economic fluctuations and stabilizing the credit cycle. However, a policy regulating the loan-to-value ratio of the residential households causes a credit shift towards the business sector. Optimal simple rules are selected using welfare analysis to provide practical implications for the evaluation, estimation and future implementation of macroprudential policies in alleviating economic risk of financial intermediaries. The second chapter examines the impact of political risk on sovereign default. An economic model with endogenous default decisions shows that political instability increases the likelihood of sovereign default. A quantitative analysis using data from 68 countries in the period from 1970 to 2010 finds that both short and long-run aspects of the political environment have significant effects. The findings suggest that a country is more likely to experience default when i) it has a relatively younger political regime in place; ii) it faces a higher chance of political turnover; and iii) it has a less democratic political system. The third chapter investigates the bidirectional relationship between banking and sovereign debt crisis. An economic model with financial intermediaries and a government sector shows that sovereign default may cause a banking crisis as banks hold a large amount of government bonds. Nevertheless, a significant amount of bailouts or bank guarantees may constrain the short-term liquidity of the government sector and trigger a sovereign debt crisis. Empirical studies using the credit default swap spreads of the Eurozone support the two-way linkage. Quantitative results also show increasing spillover effects across borders as globalization leads to greater integration of financial markets.