In the club: how and why central bankers created a hierarchy of sovereign borrowers, c. 1988–2007

Abstract

From roughly 1988 to 2007, global banks faced strong regulatory incentives to lend to members of the OECD and those of the IMF’s General Arrangements to Borrow (GAB), along with disincentives to lend to countries that belonged to neither of these groups. The culprit was the Basel Accord, also known as Basel I, a piece of banking regulation designed by the Basel Committee on Banking Supervision (BCBS) to regulate global banks’ capital levels. Why did the BCBS create a ‘club’ of riskless sovereign borrowers, and why did it use OECD and GAB membership to do so? Relying on the archives of the BCBS, I first argue that the Basel Committee chose to design a club in response to European Community (EC) policies, which threatened a number of non-EC states on the Committee. Second, I argue that the BCBS chose to define the group through OECD membership because its members embodied a key set of criteria that it associated with creditworthiness. I conclude by outlining the implications of these findings for our understanding of the BCBS, as well as for our models of how central banks construct international hierarchies.