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The Place and Theory of Banking Law or Arising of a New Branch of Law: Law
of Financial Industries

Article · January 2007

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László Vértesy
Budapest University of Technology and Economics
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Dr.Vértesy László PhD jur. PhD œc., associate professor
National University of Public Service,
Faculty of Political Sciences and Public Administration
vertesy.laszlo@uni-nke.hu
Collega XI. évfolyam 2007/2. szám

The Place and Theory of Banking Law

or Arising of a New Branch of Law: Law of Financial Industries
Prologue
Since the invention of money the financial life has always made jurisprudence to think
about and regulate it. The standard rules for money, capital markets and transactions have
been created throughout in the whole written history. Regulations have been known from the
times b. c. up to this date. In this approximation we regard Banking Law as an ancient branch
of law. Nevertheless a clear and accepted theory has not been developed till our days by the
jurisprudence.

In order to discuss the problem in the title expressed the purposes of this publication
shall be established. This essay tries to

- show the main possibilities of placing Banking Law in the entire law system,
- give a new point of view in preparing a universal theory of this law area, and finally
- make a proposal for a new and interesting solution: Law of Financial Industries.

The intention of this writing is in connection with the first difficulties arising at the
beginning of my PhD studies. I had to face two difficulties:

1) Questions and attendances

On the first PhD lessons the professors indicated interest in the themes of research of
the “new generation”. In relation with Banking Law three of them: a law philosopher, an EU-
law specialist and a public administration professional asked the following questions: “Are
there any scientific theories of Banking Law, or Financial Law?” or said approvingly “It will
be a hard work, because there is not any evolved dogmatic.”
Later the interest was drawn: the problem with the theory has to be found in the “cor-
rect” place of Banking Law in the legal system. Since if you find its position you can utilize
the existing results and approaches.

2) Getting sources
When you start a research you need sources, documents, publications etc. in relation
with the theme, so your first task is to find them. There are a great variety of titles, solutions
in all the sorts of legal systems and kinds of authors.
Then the literature and the theory of law get in touch with each other. So in this point
of view Banking Law is a hard nut to crack either.

Therefore the essay will come along each branch of law relating and confutes the
choices to reach the final conclusion: the acceptable reason for existence of Law of Financial
Industries. The refutations are based on the characteristic further more on the leader Hungari-
an and especially on the English literature of the tested and chosen branch of law.

1
First possibility: Financial Law
In our days in Hungary the utmost representatives of the jurisprudence divide financial
law into the following parts which are shown in the Table, No. 1.

Table, No. 1.

The System of the Hungarian Financial Law

Substantive Law Procedural Law Organizations

Tax acts:
Act LXXIV of 1992 on Val-
Act XCII of 2003
ue Added Tax;
on the Tax and Financial Con-
Act CXVII of 1995 on Per-
Rules of Taxation trol Administration (ac-
sonal Income Tax
Act CXXVI of ronym 'APEH')
Act LXXXI of 1996 on Cor-
Tax Law 2003 on the Exe- Customs and Finance
porate Tax and Dividend
cution of the Law Guard
Tax, etc.
of Customs of the Local self-governments
Act XCIII of 1990 on Fees
Community
Act CXXVI of 2003 on the
etc.
Execution of the Law of Cus-
toms of the Community
State Parliament
Budgeting Act XXXVIII of 1992 on State Budgeting Ministry of Finance
Law State Audit Office
National Bank Act LVIII of 2001 on the National Bank of Hungary
Act LX of 2003 on Insurance Institutions and the Hungarian Financial Su-
Insurance Business pervisory Authority (ac-
Act CXII of 1996 on Credit Institutions and Fi- ronym ‘PSZÁF’)
Other nancial Enterprises National Bank
Act CXX of 2001 on the Capital Market Tax and Financial Con-
Act C of 2000 on Accounting trol Administration (ac-
International relations: IBRD, IMF, EU ronym ‘APEH’)
Sources: Gábor Földes: Financial Law. Budapest, 2005, Osiris;
Anna Halustyik: Financial Law I-II. Budapest, 2003, Aula.

But even in nowadays the jurisprudence in other countries1 and before the Second
World War in the Hungarian law dogmatic2 either the “Financial Law” expression is only

1
Philip Wood: Comparative financial law. London, 1995, Sweet & Maxwell
George Strough, George S. Hills: The law of accounting and financial statements. 1957.
IMF Institute: Current Developments in Monetary and Financial Law, Vol. 1. 1999.
Ayer: Guide to Finance for Lawyers. 2001.
Meyer: Law in a Nutshell: Accounting & Finance for Lawyers. 2006.
or there are tax and state budgeting law books, but in this case they are irrelevant.
2
Károly, Kmety: Handbook on the Hungarian Public Administration Law. (Part IV. The Law of Financial
Administration); Budapest, 1897, Politzer
Ede, Márrfy: Handbook on the Hungarian Financial Law. Budapest, 1930, Grill
Vilmos, Mariska: Handbook on the Hungarian Financial Law. Budapest, 1875, Franklin
Kornél, Exner: Hungarian Financial Law. Budapest, 1910, Atheneum
Zoltán, Magyary: Hungarian Public Administration and Financial Law. Budapest, 1925, Grill

2
used for Tax Law (including duties, fees) and State Budgeting Law together. In these sources
each definitions of this term and branch of law are coincident consequently that Financial
Law is in relation only with the public funds, the incomes and the expenditures of the state.3
The reason and the answer why you are not able to find theory of Banking Law in Financial
Law is simple: it is not part of it. Financial Law dogmatic focuses on state funds, public law
relations and not on transactions in private law relations.
Nowadays in the foreign and international jurisprudence there is new concept to en-
large Financial Law – as Table, No. 1. shows the Hungarian system. But this does not explain
theory yet, because financial and money markets, institutions, services still preserve theirs
distinctiveness.

Second possibility: Public Administration Law, or Regulated Industries

Since the regulation is the main character of Public Administration Law, we can re-
gard Banking Law (even Insurance Law, Stock-exchange Law) as a special administration
which is related to regulated industries. These industries have common characteristics:

- their operation are regulated by the state,

- their existing determinative in the society,
- they provide services to all the citizens.

The fundamental discrepancy among financial institutions and other regulated indus-
tries is in the nature of the services provided and the risks. The regulated industries supply
elemental public needs like public transport (aircraft, train, bus), communication (telephone,
internet), energy (gas, electricity) drinking water, heat etc. Their regulation is important after
all because these supplements are in relation with our everyday life and their operations are
dangerous and if they work without any rules they can cause disasters and catastrophes. Let’s
think about nuclear power. The power plant produces energy, electricity but the safe function-
ing of this industry is not important only for citizens who live near the institution it is interest
and purpose for the State as well. So their regulated and secure operation is essential for the
whole society.
Financial services do not posses with this vital, basic character, because if they be-
come bankrupt or handle our savings in a non-adequate method we loose only our money, not
our health or our life.

Third possibility: Civil or Commercial Law

The second part of Banking Law is the law of financial services. The fundaments of
these transactions are regulated in the Civil Codes or in Commercial Law acts. (This depends
on the culture and the convention of the national concept of the law suite.) Some of the relat-
ing literature focuses on these services exclusively.4

3
In our case the role and the place of the National Bank is irrelevant, because it always has a special character.
4
Harvey L. Pitt: The Law of Financial Services. 1988.
Andrew Haynes: Financial Services Law Guide. 2006.
Graham Roberts: Law Relating to Financial Services. 2004.
George Walker and Michael Blair: Financial Services Law 2006.
Leading International Law Firms: Financial Services Regulation in the Americas. (Global Financial Services
Regulation) 2006.
Judit Kónya: Banking Transactions of Enterprises. 2001, KJK-KERSZÖV Jogi és Üzleti Kiadó Kft.
Katalin Dorkó: Banking Transactions of Residents. 2000, KJK-KERSZÖV Jogi és Üzleti Kiadó Kft.

3
 The main problem with this possibility is the characteristic of Civil Law. Private Law
is based on dispositive norms and does not like cogent norms. The other part of Banking Law
shows a very strong connection with regulation and public administration (especially the
regulated industries as above mentioned). Therefore the approximation only in the point of
view of Civil Law is effective only for services and contracts, and it can not be used for the
safe and deliberate (so called prudent) operation of these institutions.

From, one of the five capital lawyers in Roman Law, Domitius Ulpianus, (170-223) –
who differentiated ius publicum versus ius privatum – the European, more exactly the conti-
nental law, philosophers and thinkers want to put each branch of law into this dichotomy:
Public and Private Law.
“huius studdii duæ sunt positiones: publicum et privatum. Publicum ius est, quod
statum rei Romanæ spectat, privatum, quod ad singulorum utilitatem; sunt enim quædam
publice utila, quædam privatim ” 5

Charles-Louis Montesquieu (1689-1755) amplified supremely this distinction: Interna-

tional (law of nations), Public (politic law) and Private (civil law) Law, in his major work:
(On) The Spirit of the Law (1748).
“Considered as inhabitants of so great a planet, which necessarily contains a variety
of nations, they have laws relating to their mutual intercourse, which is what we call the law
of nations. As members of a society that must be properly supported, they have laws relating
to the governors and the governed, and this we distinguish by the name of politic law. They
have also another sort of law, as they stand in relation to each other; by which is understood
the civil law.” 6

But much of the new branches of law as Banking Law have a speciality: they can not
be placed into neither of them. They contain elements which differentiate them from Public
and Private law. In this case the Anglo-Saxon solution – they do not use this abovementioned
distinction for every branch of law – is better and gives a more simple way for jurisprudence.

As we have seen above in the given possibilities in relation with Banking Law law-
making creates rules in two major ways: the regulation of organizations and transactions.7
The provisions about organizations are always regulated by the state and to make these
rules effective supervisory authority or authorities are set up.
The transactional rules are formed by the suppliers and the state. The state regulates
them in the Civil Code or Commercial Law act or in other sources of law (e.g. in Hungary the
Act CXII of 1996 on Credit Institutions and Financial Enterprises), but there is a problem:
lawmaking is usually slower than the changes of the circumstances especially in the financial
life. So an uncertainty is caused by this “post-codifying” for law appliers. So this delay is
surmounted by the everyday practice of the suppliers.

5
in Digesta 1, 1, 1, 2. In András Földi, Gábor Hamza: Roman Law. 1996, Nemzeti Tankönyvkiadó Rt. …this
science has two part: Public an Private Law. Public Law is which refers to the Roman State; Private Law is
which concern the personal interest, there are matters which serve the utility of the state and others which serve
the private persons.
6
Charles-Louis Montesquieu: (On) The Spirit of the Law. (1748) Chapter 3 in Book I translated by Thomas
Nugent, revised by J. V. Prichard, 1914, G. Bell & Sons, Ltd.
7
based on Anna Halustyik: Public versus Private Law in Banking Regulation Questions and Framework An-
swers in a Complicated World. In Public Law Essays in honour of Lajos Lőrincz’s 70th Birthday. 2006.

4
Fourth possibility: Banking Law (independently)

After these abovementioned three possibilities for first view the independently Bank-
ing Law seems to be a good solution, because it solves the problem: it discusses together the
Public and Private Law areas.
The economics is engaged in theory of banks for a long while. But the regulation and
the supervision of Banking Law (both financial institutions and services) began only in the
1970s foremost in the Anglo-Saxon countries e.g. The Financial Institutions Regulatory and
Interest Rate Control Act of 1978. (it established the Federal Financial Institutions Examina-
tion Council (under the terms of Title X of the Act.) The Bank Secrecy Act of 1970 (BSA, or
otherwise known as the Currency and Foreign Transactions Reporting Act) requires U.S.A.
financial institutions to assist U.S. government agencies to detect and prevent money launder-
ing.
There was a huge increase in provincial branch offices and the emergence of the high
street bank in 1950s. Relaxation of some controls over mergers and acquisitions and in 1976
the Banking Act increased the supervisory role of the Bank of England.

After the regulations the jurisprudence began to study this branch of law. On the book
market you can find so many summary writings with the title “Bank”, “Banking law” etc.8
There are a lot of works with Banking Law title even in Hungary either.9
These documents join together the relevant parts of Public and Private Law. They con-
tain the main principles and cases of the regulation and the transactions, services. But there is
a difficulty with this kind of a small branch of law: you have to find the universal theory only
in one or two sources of law (e.g. acts, directives, decrees, ordinances, regulations etc.) and
you can base it on only international law comparison.

8
William A. Lovett: Banking and Financial Institutions Law in a Nutshell, 2005
Michael P. Malloy: Principles of Bank Regulation. 2003, West Group
Harding Williams: Federal Banking Law & Regulations: A Handbook for Lawyers, 2007.
Centre for Commercial Law Staff: Chinese Banking Law and Foreign Financial Institutions 2001.
Apostolos Ath. Gkoutzinis: Internet Banking and the Law in Europe: Regulation, Financial Integration and
Electronic Commerce 2006.
E. P. Ellinger, Eva Lomnicka, and Richard Hooley: Ellinger's Modern Banking Law. Oxford, 2005, Oxford
Norbert Horn: German Banking Law and Practice in International
Ross Cranston QC MP: Principles of Banking Law. Oxford, 2002, Oxford
Alan Tyree: Banking Law in Australia. 1990.
C. Wengler & Cornelia Gerster: European Banking and Financial Services Law. 2004.
9
T. Rusznák: Banking Law. 1997, Közgazdasági és Jogi Könyvkiadó
Botos-Halustyik-Kovács-Petrik-Rusznák-Tomori: Banking Law. 2003, HVG-ORAC Lap és Könyvkiadó Kft.

5
Final solution: Law of Financial Industries

Under the term financial industries we think about the members of the financial, capi-
tal, and insurance markets:
Table, No. 2.

The System of the Financial Industries with the Relevant Hungarian Law Suit

Environment Bank Capital or Insurance market

or money market securities market
Institutions banks, specialized credit stock exchange, invest- insurance companies
Members institutions, savings and ment companies, com- insurance coopera-
credit unions, financial mission agents, brokers, tives, associations,
companies, brokers etc.. investment fund manag- insurance brokers,
ers, commodity ex- etc..
change members, etc..
Transactions bank accounts, deposits, transaction with securi-all types of insurance
credit, loan, leasing, fac- ties, currency, goods, contracts (life, acci-
toring, checks, cards, commodity derivatives dent, liability, proper-
additional liabilities (swap), futures etc ty, etc.).
(bank guarantee) etc..
Legislation 2013. évi CCXXXVII. 2001. évi CXX. törvény 2003. évi LX. törvény
(HU) törvény a hitelin- a tőkepiacról a biztosítókról és a
tézetekről és a pénzügyi biztosítási tevéken-
vállalkozásokról ységről
2013. évi V. törvény a Polgári Törvénykönyvről and other sources

There are three possible approaches to this category.

The first one is in connection with the activities, transactions provided by the financial
industries. All of them are in relationship with business markets, everyday business life. In
this case the supplied “goods” are money and capital. These services usually have short time
completion, and are not able to reverse them.
The second way is found in business risks, like: market risk (fluctuations, accelera-
tions, recessions), system risk (security, human, accounting, electricity) and risk of state regu-
lation, control (lawmaking, supervision)
In the third point of view there is the question of regulation: full or partial regulation
of the given markets, industries.

These industries need to be regulated, because there are mass transactions on the men-
tioned markets. If they operate without any regulation, only under the myth of “lassies faire”
and if one or two or some institutions become bankrupt the whole economic system can be
shatter as the domino theory, domino effect says.

This branch of law is very unsettled because it is young, and the members of the juris-
prudence do not wish to create a common and clear theory for these markets. They just write
down and summarize the actual situation for each market or industry: the regulation system,
and give analyses about several transactions. As a matter of fact in these books and docu-
ments we do not find any effective or factual theories.

6
 There are only some internet links and books with the title “Financial Industries” or
use commitment for regulation and services10, the public and private law part of Banking
Law.

Nevertheless this new branch of law is suitable and full with possibilities from the
point of view of theory. If you compare the relevant sources of law and the common provi-
sions you find the main questions regulated:

1) Public Law part:

General provisions:
- definitions for activities and services,
- types of organizations, institutions, other suppliers, members,
- required minimal capital,
- the qualifying and participating rules for owners, and ownership rights
- personal and material requirements,
- establishment and authorization procedures and licences,
Rules on general operation:
- private administration – bodies of management and control
- internal and external control and mechanisms,
- rules of owners, managers and controllers responsibilities,
- business and financial secretes, protection of personal data,
- insider dealing, internal loan, intimation,
Prudent operation:
- amount of equity and subscribed capital,
- capital adequacy,
- exposures and investments (especially real estate) and its limitations,
- risk managing and reserves,
Supervision and control:
- type of authority,
- supervision on consolidated basis and on prudent operation,
- supervision on activities
- conglomerates, and supplementary supervision,
- tasks and sphere of authority,
- cooperation with other authorities,
- accountancy and audit,
Protections:
- funds established by the state or the members,
- registers,
Other:
- advertisements and theirs limitations,
- information,
- holidays,
- international relations.

2) Private Law part:

It would be a long list to enumerate every contract – you can find some in the Table,
No. 2. In this part all the activities have to be shown and analysed focusing on connections
either. The common attribute among these transactions on these three markets is that they are
10
George Gilligan and George P. Gilligan: Regulating the Financial Services Sector (STUDIES IN COMPAR-
ATIVE CORPORATE AND FINANCIAL LAW Volume 6). 1999

7
 in a very strong relationship, e.g. if you have not enough money to purchase securities or de-
rivatives you can conclude a loan contract with a bank, and it often happens that you have to
conclude a loan security agreement with an insurance company either as a collateral commit-
ment.

Finally with this roughly outlined backbone we can begin our hard work, our interest-
ing, exciting and challenging way to establish and form the clear, plain and general theory of
the Law of Financial Industries.

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