[Kai-Chieh Chan is co-author of the Empirical Study on International Investment Law Protections in Global Banking and Finance. He holds master degrees from Sciences Po Paris (cum laude) and Paris-Panthéon-Assas University, and he is admitted in England and Wales]
Introduction
Nowadays, it is widely acknowledged that investors are well protected by investor-state dispute settlement (ISDS) under the thousands of investment treaties in place, whether they are bilateral or multilateral. However, upon examining the sectors in which claimants operate, one element stands out. Of the 1,401 investment claims listed on the UNCTAD Investment Policy Hub website, only around 10% (approximately 140 cases) were filed by investors in the banking and finance sector. This trend is even clearer in ICSID statistics, where only 5% of claims were filed by investors in the banking and finance sector in 2024. By comparison, according to the same ICSID statistics, 38% of claims were filed by investors in oil and gas and mining, and 24% by investors in the energy sector. The low number of cases filed by banking and finance investors contrasts sharply with the more than $33 trillion market size of the global financial services sector. In comparison, the global oil and gas market, while also large, is estimated to be around $6 trillion.
How can the low rate of investment arbitration claims in the banking and finance sector be explained? According to the author’s interviews with banking and finance professionals, this may be explained by a lack of belief in ISDS. Banking and finance professionals often do not believe in ISDS because they are time-consuming and have uncertain results. This lack of trust in ISDS is also shared by many in academia. Unlike other types of economic activities, the global connectivity of financial markets and their ability to destabilize countries’ or regions’ political and economic situations means that, in a financial crisis, governments often need to act swiftly and drastically. Some argue that, by offering investor protection during economic crises, international tribunals have encroached upon states’ regulatory power and weakened the legitimacy of the ISDS system.
The author of this post explored international claims in the banking and finance sector as a co-author of a recent empirical study. The study analyzed 149 investment claims in the banking and finance sector, some of which were not included in UNCTAD’s database. The study found several noteworthy trends, the key findings of which are summarized below. Based on the data collected in the report, this post also aims to address the concerns of banking and finance professionals as well as academics. According to empirical evidence, while international law provides an efficient means of resolving disputes and offering adequate compensation to investors, arbitral tribunals also significantly defer to states’ regulatory power, especially in good faith emergency situations.
Types of International Banking and Finance Disputes
Foreign investments in the banking and finance sector can take many forms. For example, foreign investors can purchase government bonds, which the government can later alter or default on (e.g., Abaclat v. Argentine Republic). Investors can lend to foreign companies that are subsequently nationalized by the State (e.g., British Caribbean Bank v. Belize). Investors can become shareholders in banks or other financial institutions that did not receive emergency or other financial aid like their peers did (e.g., Saluka Investments BV v. Czech Republic). Investors can also invest in banks, insurance companies, or pension funds that are subsequently nationalized by the State (e.g., Banco Bilbao v. Bolivia). Statistics from the empirical study show that most international claims relate to investments in banks (36%) and loans to foreign financial institutions (27%).
The ways by which States can interfere with banking and finance investments are also extremely varied. Common types of intervention include State measures targeting, for instance by imposing a State-mandated manager or forcing restructuring, a bank or a financial institution owned fully or partially by a foreign investor (e.g., Capital Financial Holdings v. Cameroon); a State taking control of financial institutions during a crisis (e.g., Ping An v. Belgium); as well as State interference with exchange rate regulations by, for example, imposing the conversion of obligations in US dollar or Swiss franc into that of local currency, thereby heavily impacting the value of such obligations (e.g., Daimler v. Argentina and Addiko Bank v. Croatia). Statistics from the empirical study reveal that the majority of international claims filed relate to government measures targeting the financial instrument (such as bonds and loans) owned by the foreigner (33%) and those taken in emergency situations (24%).
Indeed, emergency situations, which are often linked to global or regional financial crises, often prompt the government to take actions that impact investors’ interests, thereby leading to more claims. The chart below illustrates the correlation between financial crises and the number of cases filed:
Trends in International Banking and Finance Disputes
Recently, there has been much debate on whether investment tribunals take too long to resolve disputes. Following this line of thinking, the empirical study analyzed finished cases from the time of the breach to the filing and resolution of the dispute. It found that investors in the banking and finance sector, on average, filed their claims 3.1 years after the initial breach, with a median of two years. Most cases were filed within one to three years after the alleged breach. It also found that most banking and finance cases took around two to four years. After excluding outliers, the overall average time to resolution was 3.8 years. For comparison, the mean duration of ISDS from 2017 to 2020 was 5.5 years. These findings suggest that investment tribunals have been relatively efficient in addressing global banking and finance disputes.
Aside from trends in arbitral practice, there are also certain noteworthy trends in State practice. While most investment treaties have adopted a broad definition of covered investments, States have reacted by excluding certain financial instruments from recent investment treaties when they feel investors are receiving too much protection. Some recent treaties, for example, require “loans and other debt instruments” protected under the treaty to “relate to a business activity and do not refer to assets which are of a personal nature.” (e.g., Kazakhstan – Singapore BIT (2018), Art. 1). Some treaties stipulate that debt securities must have a minimum maturity of 3 years to be considered protected investments (e.g., Belarus – India BIT (2018), Art. 1.4). Other treaties exclude the “extension of credit in connection with a commercial transaction,” such as trade financing, from the scope of protected investments (e.g., Morocco – Nigeria BIT (2016), Art. 1). Still others exclude debt securities or loans from governments, central banks, or government enterprises from the definition of investments (e.g., Hong Kong SAR-Mexico BIT (2020), Art. 1).
Winning and Losing in Banking and Finance Disputes
As mentioned earlier, some believe that banking and finance investors are overly protected by arbitral tribunals. However, the empirical study shows that banking and finance investors actually have a slightly lower chance of success. Of the 149 cases surveyed by the study, 23 were discontinued (15%), 27 were won by the investor through arbitral decision (18%), 30 are pending (20%), 23 were settled (16%), and 46 were won by the state due to jurisdiction, merits, or damages (31%).
The chart below compares these rates with those of all disputes combined:
In addition, contrary to common perception, investment tribunals have often shown deference to the state’s actions in the context of a bona fide emergency. Of the 14 cases involving emergency measures, claimants lost 9 on the merits. In the words of a tribunal, States have the sovereign power to ensure “optimal operation of the banking system […] the protection of depositors and clients, and ultimately, the protection of taxpayers” (Marfin Investment Group v. Cyprus, para. 905). That being said, this does not mean that tribunals have found themselves lacking the power to review the host State’s exercise of its regulatory powers. Rather, tribunals have recognized the need to strike a balance between the rights and expectations of finance and banking investors for a fair, stable, and non-discriminatory business environment and the State’s right to regulate. In the words of another tribunal, the:
“legitimacy or reasonableness of the investor’s expectations must be assessed in conjunction with the political, socioeconomic, cultural and historical conditions in the host State, and in particular, balancing the right of the State under international law to regulate within its borders”
(Cyprus Popular Bank v. Hellenic Republic, para. 1129).
As also can be seen from the chart above, there is a higher chance of settlement in banking and finance disputes compared to other types of disputes. In fact, some of the largest victories for investors in these cases have been settlements reached after an arbitral decision on jurisdiction or the merits. For example, in Eureko B.V. v. Republic of Poland, the parties reached an amicable settlement after Poland failed to set aside a partial award on the merits in Belgian courts.
In conclusion, an empirical study on banking and finance cases in ISDS confirms that investment treaties and tribunals do not offer excessive protection to the point of ignoring States’ regulatory powers. At the same time, it also reveals that investment tribunals have effectively addressed international claims in banking and finance, tackling a broad range of investments and forms of government intervention, while facilitating amicable settlement of disputes between the parties.
