International Bank Regulation: Shwetambari Heblikar Kyle Briggs

INTERNATIONAL BANK
REGULATION
Shwetambari Heblikar
Kyle Briggs
BANK FAILURE
When unable to meet its obligations to its depositors
Loans not repaid, Liquidity, Assets/Liabilities unbalanced,
ect.
Run on the bank (Depositors withdraw from bank)
Assets believed to decline in value
Even if assets are sound, negative expectations may
lead to financial panics
Effects travel through financial system
One banks problems may easily spread to sounder banks
CONSEQUENCES OF BANK FAILURE
Bank risk vs social risk
A bank can afford a higher level of risk than society can
afford
Banks can pass risk to other banks for a price and so on
Ultimately, society must pay the price of risk
Sub-prime Mortgage crisis 2007
Unregulated nature of global banking leaves the
world financial system vulnerable to bank failures
on a massive scale
Great Depression
Many of the precautionary bank regulation measures
taken by governments today are a direct result of their
countries experiences during the Great Depression
U.S. SAFEGUARDS
Deposit insurance (FDIC)
Lossesup to $250,000
Member banks required to make contributions to cover
costs
Reserve requirements (Fed)
Capital requirements and asset restrictions
Minimum required levels of capital to reduce risk of failure
Bank examination(Fed, FDIC, Office of the
Comptroller)
Lender of last resort (Fed)
Borrow from Feds discount window
INTERNATIONAL BANKS
An international bank is a financial entity that offers a
variety of financial services such as payment accounts and
lending opportunities to foreign clients.
Additionally, International banks should also be able to
offer information on the following value added trade

products and services such as Prepayment and structured
pre-export facilities, export receivables financing,
government backed insurance and guarantee programs,
providing credit support or enhancement, global trade
management and many more value added services.
The need to regulate international banks arises due to the
fact that any change of variance of rules may result in

conflicting transactions
In order to have supervisory standards across countries the
Basel Committee was formed

BASEL COMMITTEE
The Basel Committee was formed by the central bank governors of the group of
ten countries at the end of 1974.
Its objective is to enhance understanding of key supervisory issues and improve
the quality of banking supervision worldwide. They meet regularly 4 times a year.
The committee was never formed with an intention of being a legal force but
instead works as supervisory authority.

It has certain standards and principles to ensure best practice which are suited to
member banks own national systems.

To achieve a better coordination of the surveillance exercised by national
authorities over the international banking system.

One of the main objectives of the committees work has been to close gaps in
international supervisory coverage in pursuit of 2 main principles:

1. No foreign bank can escape supervision.
2. Supervision should be adequate.
In September 1997, the Basel Committee issued its Core Principles for Effective
Banking Supervision, worked out in cooperation with representatives from
many developing countries. That document sets out 25 principles deemed to
describe the minimum requirements for banks, and cross-bordering banking.
The Basel Committee and the IMF are monitoring the implementation of these
standards around the world.
In 1975, the Basel Committee reached an agreement, called the Concordat, which
allocated responsibility for supervising multinational banking establishment between
parent and host countries.
The Concordat called for sharing information and granting of permission for inspections
by or on behalf of parent authorities on the territory of the host authority.

The Basel Committee has located loopholes in the supervision of multinational banks and
brought these to the attention of national authorities.

The Basel Committee has recommended, for example, that regulatory agencies monitor the
assets of banks foreign subsidiaries as well as their branches.

In 1988, it suggested a minimum prudent level of bank capital (8% of the assets) and system
for measuring capital.

The committee revised framework in 2004
Basel Committees aim was to achieve a better coordination of the surveillance exercised
by national authorities over international banking system

The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. Countries
are represented by their central bank and also by the authority with formal responsibility
for the prudential supervision of banking business where this is not the central bank
The Committee reports to the central bank governors and heads of supervision of its
member countries.
BASEL II
International banking regulation is justified by the adverse consequences
of banks taking excessive risks. It therefore proposes three reforms:
requiring banks to retain a proportion of any loan that they originate, so
as to reduce the risks of moral hazard; insisting that the risks involved in
the financial products in which banks trade are transparent; and
reforming Basel II so that the amounts of regulatory capital that banks
are required to hold are less pro-cyclical than is currently the case.
In June 2004 Basel II was initially published to create an international
standard that banking regulators can use when creating regulations

about how much capital banks need to put aside to minimize risks that
banks face.
Basel II provides as a standard and acts as a protection against problems
that might arise should a bank collapse. In reality, Basel II attempts to

accomplish this by setting up rigorous risk and capital management
requirements to ensure that banks abide by the strict rule that a bank
holds capital reserves suitable to the risk that the bank is exposed to.
DIFFICULTIES IN REGULATING
INTERNATIONAL BANKING
Banks can shift jurisdictions
US regulations are diminished due to offshore banking.
Countries compete for banks by keeping regulations low
No deposit insurance.
National deposited insurance is too small to cover the large deposits
in international banks.
No reserve requirements
US can set requirements for its overseas branches, but one country
cannot solve this alone. Countries cant agree on level of reserve
requirements.
National governments dont watch foreign branches closely
US regulators track foreign branches less. Who regulates an
American branch in Germany dealing in British pounds? US,
Germany, or UK?
What central bank provides help?
NEW CHALLENGES
Emerging economies
Capital markets of poorer, developing countries (such
as Brazil, Mexico, Indonesia, and Thailand) that have
liberalized their financial systems to allow private
asset trade with foreigners
Increasing securitization and derivative markets
U.S. sub-prime mortgage crisis 2007

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INTERNATIONAL BANK

offer information on the following value added trade

fact that any change of variance of rules may result in

Basel Committee was formed

instead works as supervisory authority.

member banks own national systems.

authorities over the international banking system.

international supervisory coverage in pursuit of 2 main principles:

by or on behalf of parent authorities on the territory of the host authority.

brought these to the attention of national authorities.

assets of banks foreign subsidiaries as well as their branches.

for measuring capital.

by national authorities over international banking system

standard that banking regulators can use when creating regulations

that might arise should a bank collapse. In reality, Basel II attempts to

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