Banking on the Edge

Graham S. Steele‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎‏‏‎ ‎

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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 play ing 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 ex periencing 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 cen tury. 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 competitive ness of U.S. banks abroad would expand U.S. commerce, manufacturing, and ex ports. 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 deregu lation 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 cri ses, commodity price shocks, currency market risks, money laundering, derivatives  dealing, and the growing use of financial sanctions—as well as increasing finan cialization, 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.

Recommended Citation

Graham S. Steele, Banking on the Edge, 2 U. Chi. Bus. L. Rev. 171 (2023).

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