- Robert Effros
- Published Date:
- August 1995
Current Legal Issues Affecting Central Banks
Edited by Robert C. Effros
International Monetary Fund
© 1995 International Monetary Fund
Design and production: IMF Graphics Section
Cataloging-in Publication Data
Current legal issues affecting central banks / edited by Robert C. Effros
Papers from seminars sponsored by the Legal Department of the IMF and IMF Institute
Includes bibiographical references.
1. Banks and banking. Central—Law and legislation—Congresses.
2. Banking Law—Congresses. . Effros, Robert C.
II. International Monetary Fund. Legal Dept. III. IMF Institute
K1070.A55 1992 346’.08211-dc20
ISBN 1–55775–142–0 (v. 1 1988)
ISBN 1–55775–306–7 (v. 2 1990)
ISBN 1–55775–498–5 (v.3 1992)
Address orders to:
External Relations Department, Publication Services
International Monetary Fund, Washington D.C. 20431
Telephone: (202) 623–7430; Telefax: (202) 623–7201
François P. Gianviti
François P. Gianviti
William E. Holder
Reinhard H. Munzberg
Daoud L. Khairallah
John M. Niehuss
William M. Berenson
Cynthia A. Glassman
Victor Pavlovich Mozolin
Tobias M.C. Asser
Edwin M. Truman
Roberto G. MacLean
Hernán Felipe Errázuriz
William P. Bowden, Jr.
Richard Scott Carnell
Peter J. Wallison
Kathleen M. O’Day
Hugh S. Pigott
James R. Doty
John K. Carroll
John W. Moscow
William A. Ryback
Sydney J. Key
The concept of an independent central bank is currently the focus of much interest. The interest is not without historical antecedents. Thus, Napoleon is said to have taken an early stand concerning the matter. He believed that the central bank should be in the hands of the government, but not excessively so.1
The justification for the independence of a central bank lies largely in the belief that, insulated from short-term political pressures, it will be in a position to pursue more effectively long-term economic goals.2 However, not all opinion has been unanimous in favor of central bank independence. Some observers believe that holding the political authorities responsible for the attainment of economic goals is a surer guarantor of their achievement than investing the central bank with this responsibility.3
One aspect of the issue revolves around the question as to what should be the goal or goals of a central bank. To this end, some central bank statutes have sought to provide guidance by listing purposes or objectives. When these goals are listed, they almost always include some reference to price stability either directly or by reference to the need to preserve the value of the currency. Since other goals may also be set out in the statute, such as maintaining full employment,4 promoting development,5 or fostering a safe and sound financial system,6 the question arises whether one goal should take precedence over the others in the event of conflict between them.
Marius Holtrop, a former President of the Netherlands Bank, presented the case for viewing the pursuit of stable monetary policy as the preeminent role of a central bank:
I think that monetary policy is a thing on its own, which strives for a purpose which should be the purpose of good government under all circumstances, namely the maintenance of monetary equilibrium, in whatever sense this may be defined, as, for instance, price stability, maintenance of the value of money or the prevention of monetary causes for disequilibrium in the economy. Other purposes of economic policy should be pursued by the use of other instruments than monetary ones.7
The opposite case has been put by Lord O’Brien of Lothbury, a former Governor of the Bank of England. Countering Holtrop’s view, Lord O’Brien stated:
Certainly preserving the value of the currency should indeed be “the purpose of good government under all circumstances.” But it cannot be the only purpose and, I suggest, it should not always be the prime purpose. Other economic purposes of government, such as achieving growth and sustaining employment, are too closely related to the value of money to be seen in isolation. Thus, in my view, it is unrealistic to suggest that monetary policy should be reserved to deal with only one of a number of national economic aims. Rather all policy instruments should be used in harmony to achieve a balance of objectives.
…it would, I suggest, be unreasonable to assert that absolute ‘monetary equilibrium’ is in all circumstances the only correct policy aim to pursue. There is a trade-off between the various objectives and a decision has somehow to be taken on exactly what form of balance between the objectives should be sought.8
While there is some evidence of a correlation between the relative independence of central banks and their record of ensuring monetary value as reflected in comparative rates of inflation, the evidence is not conclusive.9 Nevertheless, there appears to be a discernible trend in favor of central bank independence in many parts of the world. Thus, despite the difference in expert opinion, noted above, and the inconclusive evidence, the member states of the European Community ratified the Maastricht Treaty and its implications for monetary union. The Treaty provisions unambiguously mandate a system of independent central banks with responsibility for defining and implementing monetary policy to the end of maintaining price stability. In the collective judgment of the member states, long-term price stability is more likely to be achieved through the constant efforts of independent central banks than through the variable actions of the political bodies of society.
If there is a discernible trend in favor of central bank independence, it is fair to ask not only what a central bank’s objects may be but also what a central bank is expected to do. In his famous commentary on the subject, Michiel de Kock, formerly Governor of the South African Reserve Bank, listed the following functions:
(1) the regulation of currency and the right of note issue;
(2) the performance of banking services for the government;
(3) the custodian and manager of external reserves;
(4) the custodian of bank reserves;
(5) the settlement of clearance balances between banks;
(6) the provision of credit facilities to banks in the capacity of bankers’ bank and ultimately lender of last resort;
(7) the control of credit and the execution of monetary policy.10
A gloss on these functions and the concept of central bank independence may be provided by reference to the Maastricht Treaty on European Union. By this Treaty, the member states of the European Community adopted amendments to the Treaty of Rome to form the European Union. As noted above, the Treaty (and an associated Protocol on the Statute of the European System of Central Banks and of the European Central Bank) provides that the primary objective of a central bank should be to maintain price stability.11 Four basic tasks12 of a central bank are then set out: (i) defining and implementing monetary policy; (ii) conducting foreign exchange operations; (iii) holding and managing the official foreign reserves; and (iv) promoting the operation of payment systems. Several provisions seek to ensure the independence of the central bank. Thus, the central bank and members of its decision-making bodies are enjoined from seeking or taking directions from the government or from any other body.13 Overdraft facilities and other credit facilities of the central bank in favor of the government are prohibited, as is the purchase directly from the government by the central bank of debt instruments.14 A central bank must be audited by an independent external auditor.15 The term of office of a governor of a central bank must not be less than five years,16 and a governor may be relieved from office only if he or she no longer fulfils the conditions required for the performance of duties or if he or she has been guilty of serious misconduct.17 Members of the governing body and the staff of the central bank are bound by the obligation of professional secrecy.18 It may be noted that there is no reference to responsibility for bank supervision. While bank supervision may be and often is the responsibility of a central bank, in some countries it is the responsibility of another agency. A firm consensus concerning its locus has so far not emerged.19
The subjects treated in this volume involve a number of issues associated with, or of concern to, central banks. Developments at international financial institutions are surveyed, including those of the International Monetary Fund, the World Bank, the International Finance Corporation, and the Inter-American Development Bank. Then regional developments affecting central banks are considered. These include the progress of the European Community toward monetary union and a unified banking and securities market, the continuing transformation of the command economies of Eastern Europe toward market economies, the economic reform in Latin America, and the resolution of the debt crisis. Focusing on country-specific developments, contributors analyze banking regulation and reform in the United States, the United Kingdom, and Canada. Finally, topics of special interest are addressed. These include the independence of central banks, government securities market regulation, and an international banking scandal.
This volume is the third in a collection of revised proceedings of seminars that have been sponsored by the International Monetary Fund’s Legal Department, in conjunction with the IMF Institute, for general counsels of central banks. The volume, which reflects topics originally addressed at the 1992 seminar, contains collected views of many of the foremost thinkers and actors in the field of banking, having particular reference to the legal aspects of the matters discussed. Following the main papers of the proceedings are the remarks of a number of distinguished commentators. Each of these commentators offers a distinct perspective on a given subject. The views expressed in the various papers and commentaries are those of the authors and should not be interpreted as reflecting the views of the International Monetary Fund or any other institution.
* * *
Mr. Gianviti addresses how questions regarding the rights and obligations of member countries are answered through the interpretation of the International Monetary Fund’s Articles of Agreement. He notes that the analogy between the practice of an international organization and the case law of national courts is particularly apposite in the case of international organizations like the Fund, which are vested with a quasi-judicial power to interpret their charters. First, he considers membership rights and obligations (which are determined by an organization’s charter) and whether these rights could be altered by a decision of another international organization or changed by the Fund without an amendment of the Articles. Then he turns to financial rights and obligations of members including the issues of whether a member could dispose of all or part of its quota and the conditions and limitations on the use of the Fund’s general resources. Mr. Gianviti focuses on the concept of entitlement and its consequences. Finally, he discusses nonfinancial rights and obligations, among which are the authority for each member to conduct its own monetary policies and the right of each member to require other members to observe their obligations under the Articles.
In a second chapter, Mr. Gianviti examines the sanctions that may be imposed on members who fail to fulfill their obligations under the Articles. The nature of the sanction varies according to whether it concerns obligations pertaining to special drawing rights or other obligations. In the latter case, the sanctions include suspension of the member’s entitlement to use the Fund’s general resources, expulsion from the Fund, and, as a protection of Fund resources rather than a sanction, the suspension of disbursements to members in arrears. Then, he describes the search for a new intermediate sanction. Other international organizations provide for total or partial suspension of rights as a sanction for breach of obligations. The Fund concluded that a member’s voting rights could be made the target of such a suspension. Since the Articles of Agreement had to be amended to provide for such a sanction, the process of the Third Amendment was undertaken and completed.
Mr. Holder provides an overview of the International Monetary Fund’s technical assistance activities. He discusses briefly the history of technical assistance as a Fund activity since the first request for assistance in 1946. The general areas of assistance include central and general banking; currency and exchange control legislation; and fiscal matters, including legislation on income tax, value-added tax, tax administration, and customs. Next, Mr. Holder identifies some of the principles that govern the Fund’s deployment of technical assistance, including the right of any member or nonmember country or any regional or international organization to request assistance and the discretion of the Fund to grant or decline the request. He notes that requests for assistance have increased. This is due to a greater awareness among the members that the objectives of sound economic adjustment and sustainable growth require the adoption of coherent financial and economic policies. Such policies need to be identified, promulgated, and properly implemented, often with technical assistance. In conclusion, Mr. Holder mentions how steps have been taken to coordinate and fund technical assistance with other international organizations and briefly notes the active role that the Fund’s Legal Department takes in providing such assistance.
Mr. Munzberg elaborates on the International Monetary Fund’s response to members’ overdue obligations to the Fund. First, he describes the relevant rules for the determination of the rate of charge on the use of its general resources. He explains that the rate of charge is intended to cover the cost of operating the Fund as well as to augment the Fund’s reserves. Then he turns to the legal basis for special charges that were introduced to recover the direct cost caused by overdue repurchases and overdue charges. Next, he details how, in 1986, the Fund adopted a system of burden sharing, which included an adjustment to the rate of charge and the rate of remuneration to offset from users of Fund resources and from creditors of the Fund the effects of overdue obligations. Mr. Munzberg summarizes the events that led the Fund to create two special contingent accounts. He points out that the first account was created to offer protection against the consequences of overdue repurchase obligations in general, while the second account has a more limited purpose. It was created in the context of the “rights accumulation” approach whereby a member in arrears can accumulate rights to Fund resources by adhering to a Fund program. The special contingent fund is intended to protect the resources that are provided following the successful completion of such a program. Mr. Munzberg concludes by noting that the Executive Board continues to strive for further simplification of the Fund’s financial system, keeping in mind the equitable sharing of cost among members.
Mr. Rigo notes that it is now well accepted that the existence of an appropriate legal and regulatory framework, with functioning institutions, is a prerequisite for sustainable economic development. He explains that the World Bank’s mandate to promote economic development is broad and includes providing assistance regarding the rules of a market economy and their implementation. He reviews the major factors contributing to the effectiveness of legal reform and illustrates how these factors have been taken into account by the World Bank. The factors include: (i) the need to consider the social, religious, customary, geographical, and historical factors that affect a society; (ii) the need for legal reform to be followed by economic reform; (iii) the importance of clearly communicating laws to the public in order for them to have an impact; (iv) the need for procedures and institutions to implement laws, so that they can be effective and enforced; (v) the capacity of the government to implement reforms; and (vi) in certain circumstances the necessity of region-wide reforms. Mr. Rigo concludes that the World Bank is in a position to evaluate the success of various reforms and to share this knowledge with its member countries.
Mr. Khairallah discusses the role of the International Finance Corporation as the world’s largest source of direct investment for private project finance in developing countries. He addresses the three main elements for successful private sector development: (i) a supportive business environment, (ii) developed infrastructure and other basic services, and (iii) a financial system that provides the institutional base that is needed to mobilize and allocate financial resources efficiently. Next, he discusses how the IFC has become involved in advising governments and state enterprises on privatization. He reviews the IFC’s capital increase, its direct borrowing operations, and the financial products available to its clients, including swaps, options, and derivatives. Then, he briefly mentions the IFC’s support for infrastructure projects, its Africa Enterprise Fund, which assists smaller enterprises in Africa, and its advisory services that help businesses obtain debt and equity financing for their projects. In conclusion, Mr. Khairallah notes the changes that have been made within the IFC as a result of its expanding membership.
Mr. Niehuss introduces the Inter-American Development Bank with its focus on Latin America and the Caribbean. He explains its capital structure and two types of loans: standard market-related loans and loans from the Fund for Special Operations, which are at low interest rates and have longer maturities. He describes the work of the Legal Department. By way of particular interest, he discusses issues relating to the privileges and immunities of international organizations, the Multilateral Investment Fund, and procurement matters. Lastly, Mr. Niehuss describes the IDB’s focus on the administration of justice in member countries and its enhanced capacity to lend directly to the private sector.
Mr. Smits reports on various issues relating to the European Union. First, he notes that the Maastricht Treaty had to be ratified by the member states and that, until its ultimate approval, its future was in doubt. Second, he describes the institutions of the European Community, and, in particular, the role of the Council of Ministers where representatives of the member states discuss and agree on policy measures and law. Third, he analyzes the history of monetary cooperation and provides a description of the European Monetary System, the exchange rate mechanism, and the European currency unit. Fourth, he sets out the structure of the Maastricht Treaty and reviews some of its innovations. Fifth, he describes the three stages of economic and monetary union that are envisaged. Mr. Smits addresses the freedom to effect financial transactions (whether current payments or capital transfers) that is assured by the Treaty. He concludes with a consideration of the economic policy coordination that is required by the Treaty.
Mr. Louis considers the objective of European Monetary Union, which is to be based on a single monetary policy, a single exchange rate policy, and a single currency. He then describes the institutions of the monetary union, including the European Monetary Institute, which will disappear upon the creation of the European System of Central Banks. He details the objectives and tasks of the system and its organs. He discusses the independence of the European Central Bank and the national central banks, which together are to constitute the European System of Central Banks. Furthermore, he addresses the requirement of accountability for the European Central Bank. In conclusion, Mr. Louis forecasts a large measure of independence for the European Central Bank.
Mr. Clarotti reports on the European Community’s financial services market and its goal of a single investment zone. The objective is to provide for a unified European securities market, even as earlier directives have laid the basis for a unified European banking market. First, he analyzes the EC Directive on Investment Services, offering insights into its history, the meaning of its terms, and its application. This Directive is intended to apply to all investment firms, including banks, so as to provide nonbank investment firms with a freedom of action that is similar to that provided to banks by the Second Banking Directive and related directives. The result will allow nonbank firms to compete with banks across the range of securities-related activities throughout the European Union. Only essential harmonization of rules was effected in order to facilitate mutual recognition of authorizations and supervisory systems. Beyond the scope of the harmonization, on structural matters and prudential regulation, home state rules govern, while matters relating to advertising and the conduct of business are the responsibility of the host state. Mr. Clarotti also appraises the related EC Directive on the Capital Adequacy of Investment Firms and Credit Institutions, which is intended to ensure that both banks and non-bank investment firms that engage in securities trading have sufficient regulatory capital to cover their market risk exposure from trading. This directive (i) provides definitions of capital for banks and investment firms; (ii) stipulates how capital requirements for banks and investment firms should be calculated on their trading business; and (iii) sets out minimum initial capital levels for investment firms. In conclusion, Mr. Clarotti points out that the two directives reflect the desire to promote an equality of treatment between banks and securities firms and to avoid having competing regulatory regimes for the two types of financial institutions.
Professor Harmathy begins by raising the question of whether there ever was a single socialist legal system in the countries of Central and Eastern Europe. He notes that while there were similar features in the laws of the various countries, there were also important differences. As for the similarities, Professor Harmathy notes the negation of private property (at least regarding the means of production), restrictions on private economic activity, the replacement of the market by state direction and planning, and the priority accorded to political ends over economic considerations. Nevertheless, the laws of various countries of the region derived from codes and legal theories of Western European countries. Moreover, differences in nationalization and the associated restrictions on private business activity distinguished the countries from one another. While constitutional and administrative law were more severely affected by political considerations during the period now ended, in some of the countries a traditional civil law approach contended with, and tended to assert itself over, the socialist approach. Professor Harmathy considers the likely effects of political changes on the legal system and the problems that arise in the privatization of state enterprises as well as those associated with the return of state property to the private sector (reprivatization). Professor Harmathy examines the need to establish a new political system and addresses the issue of the continuity of institutions and the need to make due allowance for economic and social constraints, including lack of capital and lack of expertise on the part of market participants. In this connection, he discusses issues raised when privatizing and reprivatizing, such as how to determine ownership and the introduction of proper accounting, auditing, and registration procedures. Professor Harmathy concludes that the state must formulate the rules of the game; it cannot be a passive spectator.
Professor Mozolin considers the transition from a command economy based on rigid state planning to the open market economy that is occurring, in varying degrees, in Eastern European countries and in the former Soviet republics. He sets out three requirements that the laws in these countries must satisfy in order to ensure economic reform: (i) the laws must be oriented toward new economic relations, (ii) the laws must be wideranging and flexible enough to allow for the emergence of innovative economic relations, and (iii) certain laws, such as laws on privatization, may need to be limited in duration. He then illustrates how Russian legislation is intended to meet these requirements. Professor Mozolin examines four types of laws required to carry out the privatization of state and municipal property: (i) laws authorizing private ownership, (ii) laws relating to the organization and forms of entrepreneurial activities, (iii) laws focusing on the privatization process, and (iv) laws on labor relations and social security. In addition, he briefly notes the role of laws concerning taxation, competition, and contracts. In conclusion, Professor Mozolin comments on the need for the application and observance of law that is necessary to provide the legal framework for economic reform. This involves the active efforts of the judiciary and the agencies of law enforcement, as well as the affirmative attitudes of the citizenry.
Mr. Truman argues that the great international debt crisis and the debt problems that erupted in 1982 in connection with the debt of developing countries have run their course and are now effectively concluded. He states that the proximate cause of that crisis was the massive change in the economic environment that began some years before 1982. However, the more fundamental causes of the crisis were the behavior of the borrowers and lenders and the macroeconomic policies of the industrial and developing countries in the period leading up to 1982. The proximate cause arose when a period of worldwide inflation gave way to a period of disinflation with the effect that increases in the real rates of interest associated with carrying costs of the indebtedness of developing countries disrupted their external financing. The fundamental causes may be traced to (i) lenders who lent too much on the theory that sovereign countries do not default and (ii) borrowing countries, seduced by the prospect of continuing low or even negative real interest rates, that consequently overborrowed. He notes that while there was a case-by-case approach to resolving each country’s problems, a basic strategy underlay the approaches. Initially, the matter was viewed as a liquidity problem. The associated strategy indicated that borrowing countries needed to adjust their policies by reducing budget deficits, tightening up monetary policies, and adopting more realistic exchange rates. Commercial banks were encouraged to restructure their claims and to participate in concerted programs to provide new money. Bridging loans were provided by the international financial institutions, and the resources of the International Monetary Fund were augmented through an increase in quotas. The initial restructuring of debt on an annual basis evolved into a program of multi-year restructuring. In 1985, the Baker Plan made its appearance. It was realized that stabilization of the situation was not enough and that sustained creditworthiness would require structural changes in the economies of debtor countries. The role of the World Bank expanded through longer-term lending with an emphasis on dealing with structural problems. Even though the commercial banks were exhorted to provide new money, they set about extricating themselves from the debt problem instead. The Brady Plan, which succeeded the Baker Plan, gave official approval to debt reduction and debt-service reduction in the context of the adoption by debtor countries of sound policies and commitments to structural reforms. Additionally, the plan endorsed voluntary debt reduction and debt-service reduction schemes together with their support by the international financial institutions. With time, the debt problem was ameliorated both for the major borrowing countries and for the commercial banks. Mr. Truman reflects on the lessons learned from the experience, which may be appropriate to forestall or ameliorate new debt problems.
Mr. Errázuriz reports on the legal and economic aspects of structural reforms in Chile. He believes that the case of Chile may, in certain respects, be representative of the experience of some of the other Latin American countries. A longstanding policy of import substitution and government interference ultimately proved unsuccessful and was succeeded by a reformist policy aimed at creating a market-oriented economy. Unlike the situation in Eastern Europe where a new economic system has to be built, Chile has had to rebuild and modernize its system. Mr. Errázuriz surveys the history of Chile’s economic system from the 1930s to the 1970s and notes that during this period there was increasing regulation and state intervention, expropriation, and government monopoly. Foreign investment in Chile was heavily regulated and subject to restrictions. Inefficient public enterprises led to fiscal imbalance, government overborrowing from the central bank, and inflation without growth. The country changed direction and began to liberalize its economy in the early 1970s in order to create an efficient private sector. Changes in the legal and constitutional framework introduced principles guaranteeing property from expropriation, privatizing government enterprises, deregulating business, encouraging foreign investment, lowering trade barriers, granting independence to the central bank, and prohibiting it from financing the Government and state-owned enterprises. New policies implementing these principles appear to have met with economic success. Mr. Errázuriz concludes by addressing economic and social areas where additional changes may be made in the future.
Mr. Byrne begins by explaining the function of the Federal Deposit Insurance Corporation in the banking supervisory framework of the United States. This agency is responsible for insuring deposits in banks and thrifts and, pursuant to statute, is authorized to undertake the role of conservator or receiver of failed banking institutions. Following a period of thrift and (to a lesser extent) bank failure in the United States, the situation has improved markedly. The savings and loan crisis required a massive cleanup, which was taken at enormous cost to the taxpayer. Primary supervision of savings institutions was transferred to a new agency, the Office of Thrift Supervision, and the savings and loan crisis was addressed by a temporary agency, the Resolution Trust Corporation. Deposits of savings institutions are now insured by the FDIC through the Savings Association Insurance Fund, which is separate from the Bank Insurance Fund of the FDIC. Two statutes were enacted that affect the conduct of business by banks and savings institutions. Mr. Byrne analyzes the provisions of the Financial Institutions Reform, Recovery and Enforcement Act, and the Federal Deposit Insurance Corporation Improvement Act and considers some important case precedents.
Mr. Bowden examines the prospects for banking reform in the United States. He reviews the traditional product and geographic restrictions imposed on banking institutions. Among other things, he discusses proposals for revision of current limitations on banks’ powers in the fields of securities and insurance. He discusses concerns over the complex structure of regulatory supervision of the banking industry. Then he turns to the U.S. policy of national treatment for foreign banks and its effect on domestic and foreign competition. He suggests that there are ways within the existing statutory framework for banking institutions to provide new financial products and services.
Mr. Wallison examines the history and significance of the U.S. policy of national treatment, which permits foreign banks to compete on an equal basis with U.S. banks in the United States. He sets out the definition of the concept, noting that the U.S. interpretation long favored unconditional de facto national treatment. Nevertheless, certain developments have encouraged a reconsideration of unconditional national treatment. These developments include the apparent failure of some other countries to adopt a similar policy of national treatment. He analyzes how the Federal Deposit Insurance Corporation Improvement Act authorized studies that might have led to changes in the policy. He notes that there is evidence of what may lead to an erosion in the U.S. Government’s traditional support for the concept of national treatment as applied to the entry of foreign banks into the U.S. market. The traditional U.S. policy of unconditional de facto national treatment may be changing toward a policy of reciprocal national treatment.
Mr. Pigott surveys developments concerning the financial services law of the United Kingdom, including the implementation of European Community banking directives, the creation by the Bank of England of a Legal Risk Review Committee, the publication of a Code of Good Banking Practice for banks, building societies, and card issuers, and the collapse of the Bank of Credit and Commerce International (BCCI). Among the European Community directives that have been implemented in the United Kingdom are the Bank Accounts Directive, the Second Banking Directive, the Money Laundering Directive, and the Second Directive on Consolidated Supervision. The Legal Risk Review Committee addressed a number of issues including the effect of the doctrine of ultra vires on risks concerned with swaps, aspects of insolvency law, and security interests. It also considered difficulties encountered in responding to the growing regulation of financial services in the context of constantly changing markets. Mr. Pigott then examines principles embodied in the Code of Good Banking Practice. The Code deals, among other things, with establishing the identity of persons who open accounts, the relationship between customer and banker, interest rate and other charges, procedures for dealing with customer complaints, confidentiality, and practices and procedures governing bank cards. He lists the larger issues that have been posed by the BCCI experience, such as whether the informal and broadly drawn guidelines set out in the Basle Concordat are an adequate basis for regulating international banks, how international fraud and criminal activity should be confronted, and what should be the procedure for closing and liquidating international banks. Mr. Pigott concludes that perhaps the most important lesson from the BCCI collapse is that supervisory responsibilities over one institution should not be dispersed and that, instead, there must be one supervisor in charge.
Mr. Crawford begins by describing the legal and practical framework of Canadian banking law and regulation. He notes that a new banking law and associated regulations were introduced in 1992. Traditionally, Canadian banking legislation is reviewed and revised at ten-year intervals but this revision was delayed by two years. One object of the new law was, by reducing the differences between their powers, to seek competitive equity between three types of financial institutions: banks, trust and loan companies, and insurance companies. Another object was to facilitate the formation of financial conglomerates with wholly owned special purpose financial services subsidiaries. An important concern, deriving from the failures of some financial institutions in the 1980s, was to control conflicts of interest that arise from transactions between financial institutions and related parties. In addition to the changes in the Bank Act, new powers were granted to the Canada Deposit Insurance Corporation in order to enable it to seize control of financial institutions that are not viable and, subject to certain exceptions, to stay proceedings against the institutions. Thereafter, the CDIC may either restructure the institution’s capital, sell it to another institution, or liquidate it in a winding-up proceeding, while offering compensation to shareholders and creditors. Following this review of the new legislation, Mr. Crawford describes the consideration of netting arrangements that has been undertaken by the banking authorities.
Mr. Mattingly reviews central bank independence in the United States. He notes that in the United States there is not a single central bank, but rather a network of interrelated entities including the 12 Federal Reserve Banks, which, under the supervision of the Board of Governors of the Federal Reserve, form a central bank system. After describing the responsibilities of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee, he surveys the history of central banking in the United States, beginning with the First and Second Banks of the United States. Next, he discusses the benefits of the U.S. central banking structure: its independence from other branches of government and its dual responsibilities for monetary policy and bank supervision. The system is structured to balance important interests. Thus, it includes participation by private banks, which have the power to elect two thirds of each Reserve Bank’s board of directors. The Reserve Banks are, however, under the general supervision of the Board of Governors, which is a public entity. The composition of the Board of Governors is carefully regulated by statute. The members of the Board of Governors can be removed only for cause and are appointed by the President with the advice and consent of the Senate for long, staggered terms. The Board of Governors is not dependent on Congress for appropriations for its revenues and its open market operations are exempt from government audit. The Reserve Banks are dispersed throughout the country and their composition ensures that a diversity of local interests is represented. Mr. Mattingly comments that the task of maintaining central bank independence, however well defined by statute, requires continuous effort. Independence, nevertheless, does not preclude a central bank from being accountable for its actions, and the Federal Reserve must, accordingly, submit biannual reports to Congress concerning recent economic trends, as well as the objectives of the Board of Governors and the Federal Open Market Committee.
Mr. Sparve continues the examination of central bank independence by focusing on the Swedish central bank. This is the oldest central bank in the world. He begins by listing characteristics common to central banks and by defining independence in terms of the power to formulate monetary and exchange rate policy. Then he proceeds to consider various aspects of independence. He discusses the role of consultations between a government and a central bank, the power of a central bank to implement policy, the authority responsible for the appointment of the governor, the power of a central bank over its resources, and the appropriate objectives of a central bank. Finally, he examines two questions: (i) to what extent can an independent central bank carry out better economic policy and thereby improve the performance of the economy, and (ii) how should a central bank be subject to democratic accountability?
Mr. Wahlig describes the relationship between the Deutsche Bundesbank and the Government of the Federal Republic of Germany. The German central bank is widely considered to be the model upon which the drafters of the Maastricht Treaty drew for the independence of the European Central Bank and the national banks of the European System of Central Banks. The objective of the Bundesbank is to safeguard the currency, and monetary policy is its responsibility. He discusses the duties and obligations assigned to the Bundesbank, as well as the powers conferred on it. He notes that cooperation between the Government and the central bank is necessary and is the subject of statutory governance. He comments that the Bundesbank has a duty to advise the Government on its own initiative while the Government must invite the President of the Bundesbank to take part in discussions of important matters affecting monetary policy. Mr. Wahlig closes by stating that, from the point of view of democratic accountability, the central bank must satisfy the need for information and must seek to explain its policies and justify its independence.
Mr. Doty considers regulation of the government securities market and the need for reforms that was emphasized by an important scandal. The case pointed to deficiencies in the operation of the government securities market in the United States. This market is the largest securities market in the world. Secondary-market trading in U.S. government securities dwarfs trading in secondary equity markets. The subject of regulation of this market has evinced a tension between the views of government finance officials who are primarily concerned with the problem of financing the public debt and those of securities regulators whose primary concern is ensuring that the market is fair and efficient. Mr. Doty reviews the regulatory and legislative efforts to reform the government securities market. He considers the need for regulating both the primary and secondary markets. He suggests that while the distinctive nature of the government as issuer argues against any requirement of registration in regards to the primary market, and while the secondary market for government securities has unique features, basically the market is not different in kind from other securities markets. Accordingly, he believes that cost-effective regulatory standards regarding transparency, record keeping, and sales practices are essential.
Mr. Moscow provides a prosecutor’s view on the scandal involving the Bank of Credit and Commerce International (BCCI). He observes that in order to avoid a repetition of such an economic debacle, policies regarding banking secrecy and entry of foreign banks need to be reviewed. He identifies two changes that require adaptation: an apparent lowering of entry standards in banking and a change in the technology of moving money internationally. After considering the obstacle posed to the bank regulator by banking secrecy laws, he states that if the home country does not properly regulate its banks, other countries should ban that country’s banks from doing business in their jurisdictions. He concludes that only banks from countries with sound and effective bank regulation should be permitted entry by host supervisors.
Mr. Ryback surveys the history of the Basle Committee on Banking Supervision in the context of the international supervision of banks. He identifies two original agendas of the committee: to set in place a mechanism to improve supervision over activities of international banks and to address the unevenness of capital adequacy standards in the international banking system. He then proceeds to survey particular issues, such as incorporating market risk into the capital adequacy standards, authorizing banks to do business abroad, setting the minimum standards that regulators should employ, sharing of bank examination results with foreign supervisors, and permitting domestic banks to operate branches in foreign jurisdictions with banking secrecy laws. He concludes by noting that the cost of supervision is very high, but that the cost of poor supervision is even higher.
Mr. Herrmann examines two projects of the United Nations Commission on International Trade Law: (i) the Convention on International Bills of Exchange and International Promissory Notes and (ii) the Model Law on International Credit Transfers. He defines the scope of the Convention with consideration of the requirement that a subject instrument qualify as an international instrument. Next, he notes that courts interpreting the Convention should have regard for its international character, the need to promote uniformity in its application, and the observance of good faith in international transactions. He focuses on its concepts of holder and protected holder, as well as transfer warranties and guarantees. He highlights some of the novel provisions in the Convention. Then he considers the Model Law on International Credit Transfers. He discusses the scope of the law and examines several of its provisions including those regarding the obligations imposed on senders and receiving banks, the completion of a credit transfer, the consequences of failed, erroneous, or delayed credit transfers, and conflicts of laws. Finally, Mr. Herrmann briefly surveys UNCITRAL’s work on a draft uniform law on independent guarantees and stand-by letters of credit.
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I would like to express my gratitude to Rozlyn Coleman of the Fund’s External Relations Department and Pamela Bickford Sak of the Legal Department for expert editorial assistance, to Tom Walter of the External Relations Department for production assistance, and to Jai Oh of the Legal Department and to Howard Dean, research assistant, who lent their efforts importantly to the publication of this volume. Thanks also go to Clare Huang and Sue Khandagle, my assistants, who contributed both to the seminar and to the publication of its proceedings. Several members of the Fund’s Graphics Section also made important contributions: Philip Torsani designed the cover, and Julio Prego and Victor Barcelona typeset the text. Manuscripts were prepared for typesetting by Miriam Camino-Wolosky, Ruby Libunao, and Yleem Sarmiento. Finally, I am indebted to Francois Gianviti, General Counsel of the International Monetary Fund, as well as to Ian McDonald of the Fund’s External Relations Department, and to members of the IMF Institute, who, through their guidance and support, made this project possible.
Robert C. Effros