The Operation of Supervisory Colleges in EU Banking Supervision: A Case Study of Soft Law Becoming Hard Law

• Author: Duncan Alford
• Pages: 83-119

The Operation of Supervisory Colleges in EU

Banking Supervision: A Case Study of Soft Law

Becoming Hard Law

D

UNCAN

A

LFORD

*

The concept of soft law is not easily defined.

1

One commentator defines

soft law as “all those social rules generated by States or other subjects of

international law which are not legally binding but which are nevertheless of

special legal relevance.”

2

Another commentator defines soft law as “a set of

written, advisory prescriptions.”

3

Soft law is not a contract between

sovereign states similar to a treaty.

4

Under soft law, there are no “mutually

agreed obligations” among the parties.

5

Soft law occasionally becomes

domestic law and its content has been used as an argument for the reform of

national laws and rules.

6

In this paper, I consider the case of supervisory cooperation among

international bank regulators where voluntary cooperation (soft law) over a

period of fifty years has become hard law (regulations and directives) within

the European Union. Driven by major international bank failures or

financial crises, international standards for prudential supervisory

cooperation among bank regulators have steadily developed and become

more precise and defined since the early 1970s, resulting in the creation of a

supranational bank supervisor, the Single Supervisory Mechanism, part of

the European Central Bank.

7

* Duncan Alford, Associate Dean, Director of the Law Library and Professor of Law. J.D.

with Honors, University of North Carolina at Chapel Hill. B.A. with High Distinction in

Economics and French, University of Virginia. M.L.I.S., University of South Carolina.

Professor Alford would like to thank Tim Lorrick for his excellent research assistance on this

article and also the participants in the conference on The Use of Soft Law by National Courts and

Public Authorities: An EU-China Comparison held at Peking University School of Transnational Law

in Shenzhen, China, on November 13, 2019.

1. Daniel Th¨urer, Soft Law, in

M

AX

P

LANCK

E

NCYCLOPEDIA OF

P

UBLIC

I

NTERNATIONAL

L

AW

§ 3, ¶ 8 (R¨udiger Wolfrum ed., 2015).

2. Id.

3.

A

BRAHAM

L. N

EWMAN

& E

LLIOT

P

OSNER

, V

OLUNTARY

D

ISRUPTIONS

: I

NTERNATIONAL

S

OFT

L

AW

, F

INANCE

,

AND

P

OWER

15 (2018).

4. Id. at 16.

5. Id. at 17.

6. Id. at 36.

7.

N

EWMAN

& P

OSNER

, supra note 3, at 77.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

84 THE INTERNATIONAL LAWYER [VOL. 54, NO. 1

I. Basel Committee Supervision

The Basel Committee on Banking Supervision, based at the Bank for

International Settlements in Basel, Switzerland, has taken the lead on

developing international bank supervisory standards.

8

Since the 1970s, the

Basel Committee, through its issuance of various standards for bank

supervision, has attempted to improve supervisory cooperation and reduce

systemic risk in the financial system.

9

The collapse of the Herstatt Bank in

Germany in 1974 led to the creation of the Basel Committee and the

issuance of the Committee’s first agreement on bank supervision, known as

the Basel Concordat, in 1975.

10

Due to its fraudulent bookkeeping practices,

the Herstatt Bank failed and other German banks were unable to bail it

out.

11

Legal claims against the Herstatt Bank were eventually settled.

12

Most of the international operations of the bank were conducted at its head

office in Germany.

13

While Herstatt’s assets were mainly domestic, the bank

also had significant foreign creditors.

14

The resolution of the bank’s

failure—particularly the incomplete satisfaction of foreign creditors’

claims—set a negative precedent for the settlement of international financial

crises and demonstrated the need for greater international supervisory

cooperation.

15

Organized in 1975,

16

the Basel Committee’s members consisted of

banking regulators from eleven major industrialized nations and

8. Joseph J. Norton, The Multidimensions of the Convergence Processes Regarding the Prudential

Supervision of International Banking Activities—The Impact of the Basel Supervisors Committee’s

Efforts Upon, Within and Without the European Community, in

F

ESTSCHRIFT IN

H

ONOR OF

S

IR

J

OSEPH

G

OLD

249, 259–60 (Werner F. Ebke & Joseph J. Norton eds., 1990) [hereinafter

Norton, Multidimensions].

9. Id. at 261.

10. Richard C. Williams et al., International Capital Markets: Recent Developments and Short-

Term Prospects (Int’l Monetary Fund Occasional Paper No. 7, Aug. 1981) 29–32, https://

www.elibrary.imf.org/doc/IMF084/03671-9781451981681/03671-9781451981681/Other_for

mats/Source_PDF/03671-9781463986964.pdf [https://perma.cc/EY2U-6WYR]. The original

Concordat was not released to the public until March 1981. See id. at 29.

11. Ulrich Hess, The Banco Ambrosiano Collapse and the Luxury of National Lenders of Last Resort

with International Responsibilities, 22

N.Y.U. J. I

NT

’

L

L. & P

OL

.

181, 185–86 (1990). See generally

Joseph D. Becker, International Insolvency: The Case of Herstatt, 62

A.B.A. J.

1290 (1976) (giving a

full account of the Herstatt failure). In addition, the London branch of the Franklin National

Bank suffered severe losses in the early 1970s, for which the Federal Reserve compensated with

liquidity support. Franklin National Bank eventually failed anyway, illustrating the confusion of

supervisory responsibilities over international banks. See Hess, supra note 11, at 186–87.

12. West German banks received 45 percent, foreign banks received 55 percent, and other

creditors received 65 percent of their respective claims. Hess, supra note 11, at 186.

13. See id.

14. Id.

15. Id.

16.

R

ICHARD

D

ALE

, T

HE

R

EGULATION OF

I

NTERNATIONAL

B

ANKING

172 (1986); see also

Ethan B. Kapstein, Revolving the Regulator’s Dilemma: International Coordination of Banking

Regulations, 43

I

NT

’

L

O

RG

.

323, 329 (1989); Joseph J. Norton, The Work of the Basel Supervisors

Committee on Bank Capital Adequacy and the July 1988 Report on International Convergence of

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

2021] OPERATION OF SUPERVISORY COLLEGES 85

Luxembourg.

17

The purpose of the Committee was to provide “regular co-

operation between its member countries on banking supervisory matters.”

18

The Committee hoped to encourage the convergence of banking regulation

to a common approach through the issuance of guidelines developed by

consensus among its members; thus, it sought to harmonize the banking laws

of its member nations indirectly.

19

While the Basel Committee had no legal

enforcement power itself, it encouraged member nations to abide by these

regulatory guidelines and to use whatever authority they possess to enact and

enforce them.

20

II. Basel Concordat of 1975

As a result of the Herstatt failure and the subsequent confusion it caused

over the settlement of the bank’s liabilities, the Basel Committee set as its

first task the establishment of an agreement on the respective roles of home

country supervisors to ensure that all international financial institutions are

supervised.

21

The Committee fulfilled this task by issuing the Basel

Concordat,

22

a statement of principles delineating the supervisory

responsibilities of home and host banking regulators over international

banks.

23

The Committee entitled the document a “concordat” to indicate

that the agreement did not have the legal force of a treaty.

24

Rather, the

Concordat was a set of guidelines on bank supervision reached by consensus

among banking regulators from many nations.

25

Capital Measurement and Capital Standards, 23

I

NT

’

L

L.

245, 246–47 (1989) [hereinafter Norton,

International Convergence].

17. Norton, International Convergence supra note 16, at 248 n.18; see also Norton,

Multidimensions, supra note 8, at 8. See generally Marilyn B. Cane & David A. Barclay,

Competitive Inequality: American Banking in the International Arena, 13

B.C. I

NT

’

L

& C

OMP

. L.

R

EV

.

273, 319 n.321 (1990) (providing background on the Bank for International Settlements

and the Basel Committee); James V. Hackney & Kim Leslie Shafer, The Regulation of

International Banking: An Assessment of International Institutions, 11

N.C. J. I

NT

’

L

L. & C

OM

.

R

EG

. 474, 488–89 (1986) (same).

18. Peter Cooke, The Basel “Concordat” on Supervision of Banks’ Foreign Establishments, 39

A

USSENWIRTSCHAFT

151, 151 (1984).

19. Id.

20. See id.

21. See Richard Dale, Someone Must Be in Charge,

F

IN

. T

IMES

, July 22, 1991, at 12.

22. Williams et al., supra note 10.

23. The home or parent regulator is the one responsible for supervision in the country where

the “parent bank” is headquartered and licensed. The host regulator is the one responsible for

supervision in the foreign country where the “parent bank” is operating an establishment. See

id. at 30.

24. M.S. Mendelsohn, New Basel Concordat: Main Deficiency is Intact,

A

M

. B

ANKER

, June 16,

1983, at 2.

25. See id. The word “concordat” refers to a “public act of agreement” (as opposed to a

“contract” between private parties). Id. However, the text of the Concordat was not released to

the public for several years following its adoption. Cooke, The Basel “Concordat” on Supervision

of Banks’ Foreign Establishments, supra note 18, at 152.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW