Cornell International Law Journal
Cornell Int'l L.J.
Financial regulation has traditionally been "hard": national legislatures and regulators (and sometimes international bodies) require certain kinds of behavior and forbid others, on pain of business sanctions, fines, or even criminal penalties. When a financial crisis happens, the usual after-the-fact response is more hard regulation-new laws, stricter regulations, and often entirely new regulatory agencies. That pattern goes back at least to the 1929 market crash that precipitated the Great Depression.
But the fact that financial crises still occur is leading many observers to wonder if more hard regulation is the best way to prevent the next one. However elaborate the regulatory structure, there always seem to be people in the industry willing to take the risk of getting caught to benefit themselves and their institutions. There is a growing body of opinion that what the financial world needs is a way to identify those pathological risktakers in advance and, perhaps more importantly, to make sure that the financial institutions that employ them discover and control them. Such an approach to financial governance might be characterized as "soft" supervision: rather than relying on prescribing, proscribing, and punishing specific actions, it would focus on education and persuasion (still backed up by the threat of sanctions) to encourage financial institutions to head off excessive risk-taking before it occurs.
In this Article, we report on an in-depth study of the first major effort to put this theory into practice: De Nederlansche Bank's (DNB; the central bank of the Netherlands) novel initiative to promote a healthy corporate culture in the large banks that it supervises. Despite its radical originality, this initiative has been almost entirely unreported in the U.S. legal and business literatures. As with all central banks, DNB's traditional mandate has been to ensure the stability and integrity of the national financial system by promulgating and enforcing regulations and supervising individual banks. The financial crisis of 2007-2008 prompted DNB to reassess the adequacy of that model. In response, it has expanded its supervision to include the evaluation of both individual behavior and group-level culture-"Behaviour & Culture" (B&C) -supervision. We have investigated the history and theoretical roots of B&C supervision; interviewed a large number of participants, both regulators and regulated, to understand their practical perspectives; explored the connections between B&C supervision and relevant themes in law and the social sciences; and considered the implications of B&C supervision for banking regulation elsewhere. We conclude that, while the response to B&C supervision has been generally positive, the tangible effect of its supervision remains unproven. Moreover, its relative positive reception may depend on the specific business culture of the Netherlands, which casts doubt on whether it can be exported to larger banking systems.