PRUDENCE IN GOOD STANDING: BANKING SUPERVISION AND REGULATION AT THE DAWN OF THE GLOBAL AGE

Abstract

This article studies an activity where prudence is essential: banking supervision. It focuses on
the 1970 s and 1980 s, when this activity developed considerably and became more international,
and on the Basel Committee on Banking Supervision, which became the main international
forum for banking supervision in this period. The article demonstrates that three major changes
occurred in banking prudence during the period under study: the role of the authorities in
prudence increased, prudence internationalized and it moved towards a quantitative and capitalcentred approach. Using previously unexplored archival material, the article also shows how
prudence was intertwined with political issues linked to differences in competitive conditions
between banks from different countries. Both the type of prudence that evolved from banking
supervision and the context of creating the new rules are analysed. The article explores the
forms of prudence through three lenses: the profession of banking supervisor, the guidelines
given to banks using the examples of the supervision of banks’ foreign exchange positions
and of country risk, and, finally, the construction of a common capital adequacy standard for
all countries. First, the study of banking supervision’s quantitative and qualitative development
shows that this activity grew and changed both at national and international levels, thereby
illustrating the increased role of authorities in banking prudence. Second, the Basel Committee’s
reports on foreign exchange positions and country risk typically illustrate new international
forms of prudence and more intrusive practices from supervisors in banking matters. Lastly, the
institutionalisation of prudence through the agreement on an international standard for banks’
capital adequacy appears as a quest for a formula of prudence that is never fully completed.