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This chapter provides an historical account of why the institutional setting of the BIS has been conducive to the emergence of soft law as a critical tool for managing the global financial system. Soft law developed almost naturally at the BIS as a result of the many technocratic issues it was called on to deal with throughout its long history – be it German reparation payments in the 1930s, the management of the Bretton Woods system of fixed exchange rates in the 1960s or growing financial stability concerns in the 1970s and 1980s and beyond. The Basel I Capital Accord, adopted in 1988, was a political and regulatory watershed in that respect – a non-binding code of conduct agreed by an informal committee of experts (the Basel Committee on Banking Supervision), that was subsequently implemented by national legislation in all the main constituencies. The chapter argues that the relative success of soft law in financial regulation owes a lot to the particular set-up and traditions of the BIS. However, it concludes that in order to be successful in future, soft law – much like the BIS – will have to become ever more inclusive and transparent.
It is a commonplace to state that we live in a time of continuous change. But that doesn’t make it any less true. The force and impact of change become all the more obvious when considering a horizon that spans two generations. Fifty years ago, a mere handful of advanced industrial economies dominated the global economy. Since then, a wide array of countries have emerged as new economic powerhouses. Economic development and prosperity are now more equally spread across the globe than at any other time over at least the past two centuries.
As the global organisation of central banks, the Bank for International Settlements (BIS) has played a significant role in the momentous changes the international monetary and financial system has undergone over the past half century. This book offers a key contribution to understanding these changes. It explores the rise of the emerging market economies, the resulting shifts in the governance of the international financial system, and the role of central bank cooperation in this process. In this truly multidisciplinary effort, scholars from the fields of economics, history, political science and law unravel the most poignant episodes that marked this period, including European monetary unification, the paradigm shifts in economic and financial analysis, the origins and influence of macro-financial stability frameworks, the rise of soft law in international financial governance, central bank crisis management in the wake of the Great Financial Crisis, and, finally, the institutional evolution of the BIS itself.
In public opinion, as in much of the academic literature, the financial crisis that started in 2007–8 has been blamed on financial innovations gone awry. In a nutshell, the by-now conventional account runs like this: spurred on by a cheapmoney environment, the financial boom in the years prior to the crisis generated an over-issue of new and complex financial products, such as credit default swaps (CDS), off-balance-sheet derivatives and, infamously, subprime mortgages packaged in mortgage-backed securities and collateralized debt obligations (CDO). The main problem of this type of financial innovation has been that the underlying risks of these novel products were often incorrectly priced or not transparent to the ultimate creditor. This fundamental misalignment infected the global financial system on an unprecedented scale, and eventually proved lethal once the boom ended and vulnerabilities became apparent. The generalized loss of confidence and the collective run for safety (de-leveraging in the jargon; i.e. financial institutions' attempt to get rid of high-risk, toxic assets and to improve capital/asset ratios) have sparked a global financial crisis, which in terms of its severity and longevity has been the worst since the Great Depression.
It is no surprise that the current crisis has led to renewed interest in the work of the American economist Hyman Minsky (1919–96). Minsky argued that booms associated with financial innovation can easily lead to speculative euphoria, increased financial fragility and eventual collapse (the financial instability hypothesis).
With present concerns over the regulation of the banking industry continuing to make headlines, an examination of the historiography of financial crises is timely. With contributions from world-renowned figures such as Niall Ferguson, Adair Turner and William R White, this volume investigates how financial institutions and markets have undergone or reacted to past pressures, the role of financial innovations in this process and the regulatory responses that emerged as a result.