In the club: how and why central bankers created a hierarchy of sovereign borrowers, c. 1988–2007

Abstract

From roughly 1988 to 2007, global banks faced strong regulatory incentives to lend to members of the OECD and those of the IMF’s General Arrangements to Borrow (GAB), along with disincentives to lend to countries that belonged to neither of these groups. The culprit was the Basel Accord, also known as Basel I, a piece of banking regulation designed by the Basel Committee on Banking Supervision (BCBS) to regulate global banks’ capital levels. Why did the BCBS create a ‘club’ of riskless sovereign borrowers, and why did it use OECD and GAB membership to do so? Relying on the archives of the BCBS, I first argue that the Basel Committee chose to design a club in response to European Community (EC) policies, which threatened a number of non-EC states on the Committee. Second, I argue that the BCBS chose to define the group through OECD membership because its members embodied a key set of criteria that it associated with creditworthiness. I conclude by outlining the implications of these findings for our understanding of the BCBS, as well as for our models of how central banks construct international hierarchies.

Keywords:

• Basel I
• Basel Committee on Banking Supervision
• sovereign debt
• creditworthiness
• OECD
• international hierarchy

Acknowledgements

I want to thank Alice Chessé, Arthur Duhé, Andrew Hurrell, Edward Keene, Tatiana Llaguno Nieves, Walter Mattli, Emma Park, Lizzie Presser, Jack Seddon, Claire Vergerio, Alexa Zeitz, and three anonymous reviewers for their generous comments on different versions of this paper. Mark Nance also provided very useful suggestions as discussant at ISA 2021, as did Frédéric Mérand and participants in a seminar at the Centre d’Études et de Recherches Internationales de l’Université de Montréal (CERIUM). Finally, I am grateful to Edward Atkinson for his assistance in the BCBS archives.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 There are admittedly few quantitative studies assessing this relation. A recent study shows that OECD countries and democracies more broadly enjoyed better access to global capital in this timeframe (Ballard-Rosa et al., 2021; relatedly see Beaulieu et al., 2012). However, it does not focus on banks specifically, but on capital markets at large. One obstacle confronting this kind of assessment is that national data sources keep track of the diversity of holders of sovereign debt domestically, but foreign holders are simply classified as ‘foreign’ (see the discussion in Arslanalp & Tsuda, 2014, pp. 14–15; but also in Abbas et al., 2014; Andritzky, 2012). It is also worth noting that the BCBS itself only began conducting impact studies from 1999 onwards (Goodhart, 2011, p. 193; Jackson et al., 1999).

2 Kapstein stops short of calling the BCBS an epistemic community. His general position seems to have shifted over time towards a two-level game view. See e.g. Kapstein, 2008.

3 The documents after 1997 are not available to the public.

4 The Group of Ten (G-10) was made up of Belgium, Canada, France, Germany, Italy, Japan, Sweden, Switzerland, The Netherlands, the United Kingdom, the United States. Luxembourg was an ‘associate’ member because of its monetary union with Belgium. See Walker, 2001, pp. 42–43.

5 For most of the timeframe with which this article is concerned, the Chairman was Peter Cooke (1977–1988). He was followed by Huib Muller (1989–1991), Gerald Corrigan (1992), Tommaso Padoa-Schioppa (1993–1996) and Tom De Swaan (1997). As for the Secretariat, it was led exclusively by British banking officials until 1988: Michael Dealtry from 1975 to 1984, and Chris Thompson from 1984 to 1988.

6 Basel I covered both loans and securities (Basel Committee on Banking Supervision (BCBS), 1988; see also Quillin, 2008).

7 This came with a minor caveat in the case of claims on non-OECD banks with a residual maturity of up to one year, which also received a 20 per cent risk-weight (BCBS, 1988, p. 22). This was in part designed to ‘help reduce political objections’ by countries outside the club of creditworthy countries (BISA BS/88/60).

8 Accessed on the U.S. Securities and Exchange Commission’s (SEC) EDGAR Company Filings Database at https://www.sec.gov/edgar/searchedgar/companysearch.html

9 Though it was a very slow process, in the US, all banks with a large foreign exposure were made to adopt these rules. Together, they accounted for 99 per cent of the foreign assets owned by American banks and two thirds of all the assets of the country’s banks. See Cornford, 2006, p.4.

10 This rescheduling group would at least have included Argentina, Brazil, Chile, Ecuador, Mexico, Venezuela, Peru, Morocco, Nigeria, South Africa, Turkey, Poland, Rumania, Yugoslavia, and the Philippines (BISA BS/85/69).

11 See the fourth Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR) of the European Union: (Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on Prudential Requirements for Credit Institutions and Investment Firms and Amending Regulation (EU) No 648/2012, 2013)

12 Non-EC G-10 countries did not wish to penalise their banks and public sector entities, and although they mostly did not borrow in foreign currency themselves, did not want to be excluded from the potential future benefit of borrowing on good terms in a foreign currency (BISA BS/88/57). As important as defining the in-group was defining the out-group that should be treated with caution by banks when borrowing in a foreign currency.

13 For the IMF/World Bank list of industrialised countries in 1988, see Figure 2 (see also BISA BS/86/4).

14 The co-chairmen of the conference were, ironically, Peter Cooke himself, and Huib Muller, Cooke’s successor as Chairman of the BCBS.

15 The OECD is first mentioned in BISA BS/87/36. In the initial stages, members’ preferences were not set in stone, hovering between the EC/G-10 group and the OECD (BISA BS/87/87), but the archives do not provide any additional information on this point.

16 The full name is ‘Joint Ministerial Committee of the Boards of Governors of the World Bank and the IMF on the transfer or real resources to developing countries.’

17 There were many more complaints however, notably from Algeria, the G-24, Hong Kong and Singapore (BISA BS/91/94).

18 The OECD countries that would not have passed the test are Turkey, Greece, New Zealand, Iceland, Spain, and Portugal.

19 Further discussion of this choice can be found in BISA BS/94/75, BS/94/89, BS/94/92.

20 Once more, the Committee reviewed the alternatives to the current club approach (BS/97/15).

21 This is in line with Barnett and Finnemore’s point regarding the power of IOs to classify. See Barnett & Finnemore, 1999.

22 Some of these ideas form part of what a number of scholars have identified as a contemporary ‘standard of civilization’ (Bowden & Seabrooke, 2006; Fidler, 2000; Gong, 1984).

23 As Daniela Gabor notes, the ECB is a little different in the sense that there are intense disagreements among national representatives regarding the extension of swap lines (Gabor, 2016, p. 47)

24 This point could arguably also be framed within the framework of bounded rationality, see Bruneau, forthcoming.

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Quentin Bruneau

Quentin Bruneau is an Assistant Professor in the Department of Politics at the New School for Social Research. His primary research interests are in the political economy of global finance and the history and theory of international relations.