Following the discussions of the role of law in economic growth, and financial stability and development in Chapter One and the role of the international financial architecture in Chapter Two, Parts III and IV of this volume discuss the elements of law and institutional infrastructure necessary for financial stability and development in the context of international financial standards and related research. In this context, Part III first looks toward preconditions for financial sector development.

In order for a financial system or, for that matter, a market economy to function, a number of preconditions must exist. Preconditions for financial sector development and economic growth rest on three pillars: the first institutional and legal; the second, largely legal; and the third, largely related to policy and implementing institutions. First, a market economy and a market-based financial system cannot exist if certain legal and institutional supports are not in place, namely a system of governance which establishes property rights and enforcement of contracts. It is also important to provide for the development of human capital; this has special connotations for the financial sector. On the basis of these institutional foundations, for a modern market-based financial system to function, a number of legal underpinnings must be available, including the means to use property rights for finance (such as collateral and leasing), law supporting companies or corporations (“company law”), and a supportive fiscal system.