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.

Introduction

As highlighted in Chapter 4 of this volume, lower-income developing countries are not fully integrated in the global financial system. They are not only under-represented in major decision-making forums; they also remain largely excluded from the flow of substantial private external financing. To correct this architectural weakness, the international community has stepped in to provide substantial amounts of bilateral and multilateral official financing, either through grants or concessional lending. This concessional official financing – generally described as ‘development aid’ – makes up the lion's share of external capital flows to low-income countries (see Chapter 4, Table 4.1). The aid architecture thus remains an important subset of the global financial architecture. It can be defined as the set of rules and institutions affecting aid flows, including the way aid is allocated, the modalities through which it is delivered and its accompanying conditionality requirements.

Although only loosely linked to changes in the overall global financial architecture, the aid system over the last few years has been witnessing a transformation, with policy changes at both the bilateral and multilateral donor levels and actions at the level of individual recipient countries. Overall, these changes aim to considerably improve the effectiveness of aid, to the extent that aid scholars refer to a ‘paradigm shift’ (Renard 2006). We thus aim to document how changes in this subset of the overall international financial architecture have affected actual behaviour.