Abstract
The stability of the international banking system clearly depends on a number of factors which are beyond the immediate control of national supervisory authorities. In particular the global economic environment, the volatility of both interest rates and exchange rates, the willingness and ability of debtor countries to undertake balance of payments adjustment and the availability of non-bank sources of credit, all have a direct bearing on the riskiness of international lending. The present paper, however, focuses more narrowly on the role of prudential regulation and the scope for increased international co-operation in this area. The discussion is divided into three parts: a comparative overview of national regulatory arrangements; a critical appraisal of the present approach to international co-ordination; and alternative proposals for improving the supervisory system.
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Notes
See, for instance, the Bundesbank’s comments on the impact of uneven solvency requirements in “Bank Supervision on the Basis of Consolidated Figures”, Monthly Report of the Deutsche Bundesbank, August 1981, pp. 25–27.
The tendency for banks pursuing high risk strategies to speculate in the foreign exchange markets, where official supervision is particularly difficult, is well documented. For a notorious example see Joan Spero, The Failure of the Franklin National Bank, Columbia University Press, 1980, pp. 63–67.
An example of this practice is cited by Michael Pakshong, former Managing Director of the Monetary Authority of Singapore, in “Supervision of a Regional Financial Centre”, International Conference of Banking Supervisors, London, July 5–6, 1979, Record of Proceedings, p. 20.
FINE: Financial Institutions and the Nation’s Economy, a compendium of papers prepared for the FINE Study, Book I, Evidence Submitted by the Board of Governors of the Federal Reserve System, 94th Congress, 2nd Session, 1976, p. 499.
For an explanation of the FDIC approach see Statement on FDIC Procedures in Handling Failed or Failing Banks, presented by Irvin Sprague to Commerce, Consumer and Monetary Affairs Subcommittee, Committee on Government Operations, House of Representatives, July 16, 1981.
Andrew Brimmer, International Finance and the Management of Bank Failures: Herstatt versus Franklin National, paper prepared for presentation before a joint session of the American Economic Association and the American Finance Association, September 15, 1976, p. 49–50.
See, for instance “Fed offers new Approach to Eurocurrency Market” New York Times, September 3, 1974; Spero, pp. 156–68; Jack Guttentag and Richard Herring, “The Lender of Last Resort Function in an International Context”, Working Paper no. 9–82, Rodney L. White Centre for Financial Research, p. 28–32.
A Bundesbank director has commented as follows on the question of liquidity assistance to Luxembourg subsidiaries of West German banks: “The central bank that is responsible for the parent bank cannot be under any obligation to provide foreign subsidiaries with liquidity so long as this central bank has no means of exerting any influence on the foreign subsidiaries, for instance by fixing reserve requirements”. Panel contribution by S. Burger, International Conference of Banking Supervisors, London, 1979, pp. 31–32.
The Cooke Committee’s approach to international financial co-operation is described by its Chairman, Peter Cooke, in Developments in Co-operation Among Banking Supervisory Authorities, a paper presented to the Conference on the Internationalisation of the Capital Markets, New York City, May 19–21, 1981.
Report to the Governors on the Supervision of Banks’ Foreign Establishments, Committee on Banking Regulations and Supervisory Practices, Basle, 26 September 1975. This report was approved by the Governors in December 1975 and released to the public in March 1981. See also H.J. Muller, “The Concordat: A Model for International Co-operation”, De Nederlandsche Bank N. V. Quarterly Statistics, 1979, vol. 2, pp. 84–91.
See Consideration of Banks’ Balance Sheets: Aggregation of Risk-Bearing Assets as a Method of Supervising Bank Solvency, Committee on Banking Regulations and Supervisory Practices, Basle, October 1978.
Peter Cooke, “Developments in Co-operation Among Banking Supervisory Authorities”, p. 8.
Compendium of papers prepared for the FINE Study, Evidence Submitted by Comptroller of the Currency, p. 385.
Compendium of papers prepared for the FINE Study, Evidence Submitted by Board of Governors of the Federal Reserve System, p. 546.
These requirements are embodied in the Federal Reserve’s reporting form FRY-7 which was first proposed in October 1979 and finally introduced in modified form in February 1981, following strong protests from foreign banks and supervisory authorities. Several national authorities have argued that FRY-7 is in conflict both with the national principle of regulation and also with the Basle Concordat. See, for instance, Comments Regarding Docket No. R-0256 (Proposed Form FRY-7) and Docket No. R-0257 (Proposed FRY-8F): Bank of England, 11 January 1980; Deutsche Bundesbank, 11 March 1980; EEC Commission, 16 June 1980; et al.
The Measurement of Liquidity, Bank of England, Discussion Paper, March 1980, p. 13.
The Canadian Inspector General of Banks has expressed the Canadian authorities’ approach as follows: “I should also note that in one way we have not been prepared to follow completely the precepts of the Concordat. The Canadian Bank Act requires, and will continue to require, the Inspector General of Banks to protect the creditors, and also the shareholders of banks operating under it. It was my predecessor’s view, with which I have concurred, that we could not pass that responsibility for the creditors back to the foreign parent or another supervisory authority. Our proposals therefore provide for the entry of foreign banks only in the subsidiary form. It is obviously our view that a well run and supervised subsidiary can survive the bankruptcy of the parent bank”. Panel Contribution by William Kennett, International Conference of Banking Supervisors, London, 1979, pp. 70–71.
See Banking Secrecy and International Co-operation in Banking Supervision, Committee on Banking Regulations and Supervisory Practices, Basle, August 1981.
if a large depositor withdraws funds from a bank, the bank can borrow readily in the inter-bank market, for the [Euro-currency] market is a closed system. Withdrawals from a particular bank come back into the market or can be brought back into the market one way or another — provided, of course, that the key central banks and in particular the Federal Reserve do not withdraw funds from the system altogether. That feature marks a big difference from national banking where there is the possibility that the public will withdraw deposits in favour of holding currency… so the usual modes of government intervention — deposit insurance, reserve requirements and close surveillance over portfolios of banks — would not seem applicable to the Eurocurrency market, whatever their merits may be today in national banking systems. Summary remarks by Richard N. Cooper in Gary Hufbauer (ed.), The International Framework for Money and Banking in the 1980’s, Georgetown University Law Center, 1981, p. 9.
The issue of moral hazard is, for instance, discussed by several authors in Franklin Edwards (ed.), Issues in Financial Regulation, New York, McGraw-Hill, 1977.
Herbert Grubel, “A Proposal for the Establishment of an International Deposit Insurance Corporation”, Princeton Essays in International Finance, No. 133, July 1979.
A foreign branch may, for instance, be brought down by the activities of the parent institution in its country of origin. Given such interdependence, an acute free-rider problem would arise from the co-existence of (a) national regulatory regimes embracing parent banks and (b) a separate international regulatory regime covering foreign establishments.
Guth Underlines Microeconomic Risks for Private Banks in Recycling Funds, International Herald Tribune, June 16, 1980.
See Dr. Wilfried Guth, Trends in International Banking, Speech given at the 34th International Banking Summer School on August 31, 1981, in Timmendorfer Strand, Federal Republic of Germany, pp. 12–13.
James Dean and Ian Giddy, “Averting International Banking Crises”, Monograph Series in Economics and Finance, Salomon Brothers Center, New York University, 1981.
Foreign currency deposits placed in offshore banking centres may, however, be subject to “country risk” in that the host authorities could conceivably apply exchange controls preventing the transfer of such funds to other centres. See Robert Z. Aliber, Exchange Risk and Corporate International Finance, John Wiley and Sons, 1978, pp. 86–88.
Arthur F. Burns, Reflections of an Economic Policy Maker, American Enterprise Institute, 1978, p. 365.
This proposition is supported by the behaviour of Euro-bank deposit rates during periods of uncertainty such as 1974: See Guttentag and Herring, The Lender of Last Resort Function in an International Context, p. 24. It is also consistent with the argument advanced by Guttentag and Herring that financial markets tend to ignore low-probability events: see Financial Disorder and the Eurocurrency Markets, Mimeograph, University of Pennsylvania, March 1981.
During the 1974 Euro-market crisis funds moved both between banking groups and from the Euro-markets into the United States. The latter move was partly compensated by the recycling of funds from American parent banks to their foreign branches but there is, of course, no saying that in such a situation individual parent banks will necessarily gain what their foreign branches lose. See Brimmer, International Finance and the Management of Bank Failures, pp. 52–54.
Remarks by Governor Wallich at the International Conference of Banking Supervisors, Washington, DC, September 24, 1981, p. 2.
The equity principle has been advocated by a former Director of Financial Institutions in the EEC Commission. See H.R. Hutton, “The Regulation of Foreign Banks — A European Viewpoint”, Columbia Journal of World Business, Winter 1975, p. 113.
For a full analysis of this relationship under US law see Patrick Heininger, “Liability of US Banks for Deposits Placed in their Foreign Branches”, Law and Policy in International Business, vol. I I, 1979.
The legal status of letters of comfort is examined in Jacques Terray, “La Lettre de Confort”, Banque, no. 393, March 1980.
Official pressure was, for instance, brought to bear on United California Bank of Los Angeles to support its majority owned Basle affiliate when the latter incurred large commodity trading losses in 1970. See Francis Lees, International Banking and Finance, John Wiley and Sons, 1974, pp. 42–43.
See, for instance, views of the Board of Governors of the Federal Reserve presented in Compendium of papers prepared for the FINE Study, Book I, p. 499 and comments by Rt. Hon. Gordon Richardson, Governor of the Bank of England, International Conference of Banking Supervisors, London, 1979, pp. 8–9.
For an analogous proposal to fragment risk within the US domestic banking system by “building a wall” between bank holding companies and their bank subsidiaries, see Fischer Black, Merton Miller and Richard Posner, “An Approach to the Regulation of Bank Holding Companies”, Journal of Business, 1978, vol. 51, no. 3, pp. 400–402.
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Dale, R. (1983). Safeguarding the International Banking System: Present Arrangements and a Framework for Reform. In: Fair, D.E., Bertrand, R. (eds) International Lending in a Fragile World Economy. Financial and Monetary Policy Studies, vol 7. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-6824-0_21
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