What’s old is new again. The risks of international banking have returned to prominence in the wake of the Russian invasion of Ukraine. Global banks are playing a central role in the economic sanctions regime imposed upon Russia in response to its acts of military aggression. Foreign banks have retrenched from serving the Russian economy. International markets for debt, equity, and commodities are experiencing significant disruptions. The solvency measures and quarterly earnings of global banks have been impacted. These risks are new versions of an old story. International banking has been a fraught endeavor dating back more than a century. Despite their significance, the international operations of U.S. banks are often overlooked by legal scholarship.
This Article fills in some of this picture by examining the evolution of U.S. banks’ global presence through the lens of an underappreciated, but significant, law: the Edge Act of 1919. The Edge Act began as a framework for privatizing the post-World War I rebuilding effort. Its drafters argued that promoting the competitiveness of U.S. banks abroad would expand U.S. commerce, manufacturing, and exports. Instead, through a series of legislative amendments and misadventures with overseas expansion, the Edge Act became a vehicle for global banking conglomerates to operate lightly regulated overseas “nonbank-banks.” International banking policy came to prioritize the U.S. financial sector as its primary beneficiary, with deregulation as the predominant vehicle for achieving this goal.
The Edge Act is a case study for evaluating the longstanding desire to ensure that U.S. banks remain globally dominant. The results of eroding geographic and activity limitations include exposure to evolving risks—including sovereign debt crises, commodity price shocks, currency market risks, money laundering, derivatives dealing, and the growing use of financial sanctions—as well as increasing financialization, and an historic global financial crisis. As the experience of the Edge Act demonstrates, claims about the value of financial deregulation and its connection to international competitiveness should be treated with skepticism.
The appropriate role of global financial institutions is likely to be an issue of continued relevance as the emergence of nascent digital asset markets and digital banking models challenge the spatial and conceptual borders of financial markets. Without a thorough reexamination of the purposes and functions of international banking as we know it, beginning with the Edge Act, global banks may continue to exploit legal structural complexity in the name of international competition. As the case of the Edge Act demonstrates, such opportunistic use of regulatory arbitrage exposes the public to significant financial risk.
Steele, Graham S.
"Banking on the Edge,"
The University of Chicago Business Law Review: Vol. 2:
1, Article 4.
Available at: https://chicagounbound.uchicago.edu/ucblr/vol2/iss1/4