Law in Financial Governance
Debates on financial governance are often framed in terms of macroeconomic variables, technical capacity, and institutional insulation from political influence. Law typically appears in this literature as a background condition: either as a set of formal constraints that incentivise or restrict policy action, or as a technical apparatus that stabilises market expectations.
This framing, however, underplays law as a social phenomenon permeated by disputes over values, interests, and worldviews. Indeed, the constitutive role of law in financial governance is far more complex than is usually assumed. Legal forms do not merely support pre-existing economic logics or political decisions; they actively shape the distribution of authority, the repertoire of legitimate interventions, and the political conflicts that structure state-finance relations.
It is hardly novel to observe that modern finance is deeply legal. Markets depend on legal definitions of property, liquidity, risk, and solvency;[1] financial transactions rely on contracts;[2] and public authorities operate through mandates, procedures, and accountability regimes[3] – all of which are codified in law. Yet recognising the legal foundations of finance is only the first step. The key issue is how legal foundations organise power, enable certain forms of action, and curb others. This perspective is particularly important for the analysis of central banking. This brief essay therefore draws attention to the ways in which law constitutes relations of power within these enigmatic yet pervasive institutions.
The Brazilian case helps to substantiate the argument. In my research, I identified that the legal forms adopted by the central bank over time have, on the one hand, constructed and consolidated its regulatory capacity without the need for extensive public debate or sweeping legislative reform and, on the other, forged specific entanglements with financial actors and international organisations, thereby securing their ascendancy over policymaking.[4] Law thus offers an analytical vantage point from which to apprehend the fine-grained dynamics of social processes that might otherwise remain opaque to outside observers.
Powerful Yet Subordinate
Financial governance is often presented as a technical and apolitical domain, mediated by expertise and shielded from democratic contestation. Such a framing renders its political dynamics difficult to analyse. Yet over the past two decades central banks have emerged as some of the most powerful institutions in contemporary capitalism. In the aftermath of the 2008 global financial crisis, and again during the COVID-19 pandemic, their mandates, balance sheets, and policy instruments expanded on an unprecedented scale. Central banks were no longer confined to price stability; they became central actors in crisis management, economic stimulus, and forward guidance. This expansion of power, however, has not translated into a weakening of finance or a return to state-led, Keynesian-style economic governance. On the contrary, it has largely reinforced the position of incumbent financial actors.[5] By stabilising asset prices, backstopping key market participants, and extending liquidity on an unprecedented scale, central banks have ultimately entrenched and expanded the role of financial markets within the global economy.Law is part of the explanation for this apparently paradoxical figure of a central bank that is increasingly powerful yet simultaneously subordinate to finance.
Much critical scholarship emphasises how states increasingly “govern through markets”, relying on financial actors and infrastructures to implement public policy. While this diagnosis captures finance’s infrastructural power over state action,[6] it risks portraying law as a passive conduit through which financial domination operates. In practice, legal foundations structure how financial actors gain influence, under what conditions, and with what vulnerabilities. Law may entrench incumbent interests, but it can also fragment authority, generate conflicts of competence, and produce dependencies that constrain both public and private actors.
Law as a Contested Terrain
Analytically, treating law as constitutive calls for an actor-centred and process-oriented socio-legal approach. Rather than starting from formal legal texts or ideal-typical institutional models, it is necessary to examine how different actors mobilise legal concepts, rules and procedures in practice. This includes attention to how legality is invoked to justify action, to shift responsibility, or to claim authority, as well as to how legal uncertainty is managed or strategically maintained.[7]
As a contested terrain, law shapes key variables of financial governance. It determines who participates in decision-making, how actors pursue their agendas, and how power is redistributed across institutions. As legal rules are interpreted and enforced, they acquire new meanings and generate effects that are not fully anticipated at the moment of enactment.
Layered Legal Foundations, Fragmented Power
In examining the responses of the Central Bank of Brazil to the three most significant recent crises, I observed that the relative prominence of different actors – including incumbent banks, international organisations, legislators, the government, and the central bank itself – varied according to the legal foundations that were mobilised in each context. These shifting legal bases produced distinct political dynamics and enabled different crisis-management responses across the banking crisis of the 1990s, the 2008 global financial crisis, and the Covid-19 pandemic.
Across these crises, the central bank’s accumulation of power through law proved both cumulative and fragile. Political opposition to the opaque legal form adopted in the reforms of the 1990s culminated in a legislative backlash, expressed in a statutory prohibition of bailouts. This restriction formed the backdrop to the expansion of the scope of the Fundo Garantidor de Crédito. Initially conceived as a deposit insurance scheme, from 2008 onwards it came to assume the function of a de facto lender-of-last-resort in Brazil, mediating mergers and acquisitions and extending loans to insolvent institutions. This development, however, generated conflicts of interest in crisis management that had not been fully anticipated. By contrast, the constitutional form assumed by the new extraordinary powers granted to the central bank during the Covid-19 pandemic conferred legitimacy on a more comprehensive expansion of its role in Brazilian governance, including the operation of the country’s most widely used digital payments infrastructure. At the same time, it required sustained efforts at depoliticisation in the face of measures that were overtly political in character.
In other words, each additional layer of legal foundation expanded the central bank’s capacities while simultaneously generating new constraints on its action, fresh conflicts of interest in crisis management, and forms of politicisation that policymakers sought to avoid. In this sense, law structured not only who prevailed and who did not in financial governance, but also the terms of their victories and defeats. The Brazilian case suggests that finance occupies a central position not simply because central banks govern through markets, as the literature on infrastructural power claims, but because legal foundations create enduring channels of influence and contestation. The broader implication of an agenda that treats law as a constitutive element is the recognition that central banks are not monolithic centres of power. Their authority is internally constrained by the very legal foundations that enabled their rise. Power expands, yet it does so in fragmented and often contradictory ways. For this reason, the legal foundations of central banking remain politically contingent and inherently revisable, notwithstanding sustained efforts at depoliticisation aimed at removing them from democratic debate.
[1] Carruthers, B. (2015). Financialization and the institutional foundations of the new capitalism. Socio-Economic Review, Volume 13, Issue 2, April 2015.
[2] Pistor, K. (2013). A legal theory of finance. Journal of Comparative Economics, 41(2), 315–330.
[3] Schapiro, M. (2023). Beyond the Convergence-Divergence Divide: Comparing Banking Regulation in LatinAmerica. Revista Direito GV, v. 19.
[4] On the relationship between legal forms and political dynamics in the construction of the Brazilian banking market: Mouallem, P. (2025). Managing Crises, Crafting a Market: Legal Form and Political Dynamic in Brazil’s Banking Market Reconstruction (1994–2002). Social & Legal Studies, 0(0). On legal changes, the role of the state and of banks in recent processes of digital financialization: Mouallem, P. (2026). Traditional banks go digital: how incumbents are shaping digital financialisation in Brazil. Journal of Cultural Economy, 1–18.
[5] This point builds on the provocation advanced by Coombs, N., & Thiemann, M. (2022). Theorizing state-economy boundaries as central bank effects. Economy and Society, 51(3), 406–430.
[6] A careful reconstruction of how the notion of infrastructural power has been employed in the literature is provided by Coombs, N. (2025). ‘Infrastructural power in financial governance: Its meaning, applications, and varieties. In C. Westermeier, M Campbell-Verduyn & B Brandl. The Cambridge Global Handbook of Financial Infrastructure.
[7] A sharp and accessible introduction to the political nature of law in the construction of the economy is provided by Edelman, L. B., & Stryker, R. (2004). A sociological approach to law and the economy. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (2nd ed.). Princeton University Press.