The Allocation of Risk in Cross-Border Deposit Transactions

Improvements in the technological infra-structure have freed financial institutions from many of the constraints of geography. Yet when courts are asked to determine liability after some event interferes with the payment of an international bank deposit, they often fall back on the notion of where the deposit is kept. This emphasis implicitly treats a bank deposit as if it is more a physical commodity at an unambiguous location where an exchange must take place, rather than as an electronic bookkeeping entry that spans national borders. The authors summarize 32 court decisions from five countries that reflect the variety of settings in which problems regarding the allocation of political risk in cross-border deposits can arise. The cases noted arose from some of the most traumatic events of the 20th century. The continuing growth in cross-border deposits suggests that conflicts over sovereign risk allocation will occur with increasing frequency. The authors note several common features of the cases: The international aspect of deposit transactions. International conflict of laws. The lack of risk allocation provisions in deposit agreements. The authors then evaluate the jumbled legal framework underlying the decisions and question whether the framework provides efficient rules for allocating political risks. Based on this analysis, the paper supports an alternative approach based on the assignment of property rights and the allocation of commercial risk. The authors argue that the distribution of commercial risks generally is efficient and that the distinction between commercial and political risks is neither useful nor definable. The advantage of adopting a commercial perspective regarding the allocation of political risks is that it affords banks and depositors greater ability to forecast the outcome of future cases. This may prevent some litigation by increasing the likelihood that parties will agree on the relative probability of the outcome in court. Moreover, it would provide a more efficient legal framework for cross-border deposit transactions.