Academic journal article Harvard Law Review

Too Sovereign to Be Sued: Immunity of Central Banks in Times of Financial Crisis

Academic journal article Harvard Law Review

Too Sovereign to Be Sued: Immunity of Central Banks in Times of Financial Crisis

Article excerpt

States have long struggled to reconcile the public interest in avoiding judicial interference in foreign relations with the private interests of citizens who have been aggrieved by a foreign state. The American approach to this issue has been codified in the Foreign Sovereign Immunities Act of 1976 (1) (FSIA), which provides that, as a general matter, sovereigns receive immunity when exercising the unique powers of a state, but not when participating in "commercial activity," defined as activity that although performed by the sovereign is of a type that a private party could also engage in. (2)

The FSIA also offers added protections for some traditionally significant sovereign assets. (3) One type of entity that receives such added protection is foreign central banks. Central banks perform critical functions in the global economy, ensuring that currency markets are stable and providing emergency assistance in times of financial crisis. Over time, however, courts have eroded that special protection, applying the "commercial activity" test to virtually define away the added security for sovereign functions performed by central banks, because the same activities that central banks undertake for market regulation and intervention are also undertaken by private parties acting out of a profit motive. In addition, courts have applied common law corporate veil piercing principles to question whether central banks are even independent entities, or whether they should instead be treated as the alter egos of their sovereign states and thus no longer qualify for the special protections the FSIA provides. But this retreat from more absolute immunity for central banks is particularly dangerous. It fails to recognize that central banks often perform their sovereign, regulatory functions through open market activities, presenting especial risk during financial crises. Such crises create a "perfect storm," during which central banks are most likely to lose their immunity protection at precisely the time they need it most. First, litigious creditors seek any liquid assets they can obtain--specifically the foreign exchange reserves of central banks. Second, central banks are more likely to be acting as private players in the market--creating credit facilities to provide liquidity previously provided by defunct private institutions. Third, central banks are acting at the direction (i.e., as the alter ego) of their parent governments. This "perfect storm" presents risks to the global economy, the U.S. economy, the political goals of the FSIA, and the legal consistency of the concept of sovereign immunity.

It need not be so. Courts should return to a test that protects central bank activity based on the purposes that it serves rather than on whether it is the type of activity a private party would engage in. Such an approach would ensure that central banks are protected from judicial interference in performing their sovereign financial transactions, serving both the theoretical goals of sovereign immunity and the practical needs of financial regulation and stability.


A variety of factors have resulted in increased litigation against sovereign governments and central banks. Two bear particular note.

First, sovereigns have, in recent years, more frequently waived their immunity. (4) By clearly defining when sovereign immunity applies, the FSIA encouraged private parties to contract around its default provisions, leading to more explicit waivers negotiated to "enabl[e] third parties to deal with the [sovereign] instrumentality knowing that they may seek relief in the courts." (5) The existence of waivers, however, hardly settles that all of the sovereign's various components are subject to suit. The FSIA provides for separate immunity for different juridical entities within a government, causing the particular conundrum addressed by this Note--when may the assets of one sovereign entity be seized in satisfaction of a judgment against another? …

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