Foreign banks in developing countries:
Operations, services and lending credit provision are very much
dependent on:
 profitability of clients = poor are left with less or very expensive
services (impact on farm production!!) = profits off the rich in poor
countries go to rich shareholders worldwide  less capital in the
country to invest domestic economy
 profitability of products and operations
 host country assets in hands/managed by foreign banks: savings
in foreign hands (ca. 90% in Mexico); savings can be transferred
abroad = problem in time of crisis (see ICESAVE)
 activities in other countries by the same foreign bank: less credit
to (smaller) local producers if bank is in trouble in other countries,
Foreign banks and risks
 regulation and supervision of new complex financial products and operations
might be inadequate in developing countries
 host supervisor and regulator and monetary policy are loosing sovereignty
 offering financial products that are risky or include important capital transfers
abroad
 competition from foreign banks can lead to:
■ risky behaviour and lending by domestic banks as well as foreign banks
themselves (e.g. Asian crisis was caused a.o. because of foreign banks
competing for market shares were providing risky lending) = fragile financial
operators who that are easily affected by financial crisis
■ more and more mergers and acquisitions among domestic banks (consolidation,
is happening in Brazil now (Itau + Unibanco)) = banks become too big to fail
 Basel II might result in developing country banks being less competitive,
making them more vulnerable to foreign take-overs
 Speculation by foreign banks against host country currencies (e.g. in
Uganda, in relation with issuing of bonds)
INSTITUTIONS
- impacts on financial markets and regulation
World Bank and IMF
Loan conditionalities:
 Obligation to privatise state banks
 Liberalisation of the capital account and foreign currency transactions
 Liberalise interest rates
 ….
IMF
 After the Asian financial crisis in 1997-1998 (considered to be caused by
lack of regulation and independent supervision/‘crony capitalism’)
 set up different programmes to improve financial regulation and
supervision in developing countries :
■ The Financial Sector Assessment Programme (FSAP)
■ The Financial Sector Reform and Strengthening Initiative (FIRST)
 change regulation and supervision in developing countries, based on
neo-liberal thinking
REGULATION & SUPERVISION
 Home supervisors of banks are responsible for branches abroad
 Home and host supervisors are supposed to work together in
host countries regarding affiliates abroad of banks
 No central supervision of international financial conglomerates
and their transactions
 No binding regulation at international level to be implemented
by the international financial operators or to be imposed on the
latter by governments where they are operating.
 International voluntary standard setting and discussing
committees related to banking, insurance and supervision :
many developing countries do not participate or do not have the
means to implement the standards
International standard setting organisations:
 Basel Committee on Banking Supervision (BCBS):
http://www.bis.org/bcbs/index.htm
 Basel II = capital reserves and risk management standards
 principles of effective banking supervision
 International Association of Deposit Insurers (IADI):
http://www.iadi.org
 International Association of Insurance Supervisors (IAIS):
http://www.iaisweb.org
 International Organisation of Securities Commissions (IOSCO):
http://www.iosco.org
 Committee on Payment and Settlement Systems (CPSS):
http://www.bis.org/cpss/
 CPSS-IOSCO Task Force on Securities Settlement Systems:
http://www.bis.org/cpss/index.htm; http://www.iosco.org
 International Accounting Standards Board (IASB):
http://www.iasc.org.uk
 International Auditing and Assurance Standards Board (IAASB):
http://www.ifac.org
International organisations with no standard
setting goals include
 Committee on the Global Financial System:
http://www.bis.org/bcbs/index.htm
 Financial Stability Forum: http://www.fsforum.org/
 Markets Committee: http://www.bis.org/about/factmktc.htm
 Irving Fisher Committee on Central Bank Statistics:
http://www.bis.org/ifc/index.htm
Some cooperation among the international financial bodies
through joint discussing committees such as for instance:
 The Joint Forum
 CPSS-IOSCO Task Force on Securities Settlement Systems
 BCBS Transparency Group and IOSCO TC Working Party on the
Regulation of Financial Intermediaries
!?
 Who takes care at international level that banks and
financial conglomerates do not become too big to fail?
 The current crisis sees more mergers and acquisitions
whereby some financial conglomerates become even
bigger!? “Seems they all want to become too big to be
allowed to fail”
 ….
TREATIES
 The OECD Code of Liberalisation of Capital
Movements
 Nice Treaty
BITs:






A broad definition of investment
Non-discrimination principles
Fair treatment
Freedom of capital movements
Expropriation rules and compensation
Investor-to-state dispute settlement and state-tostate dispute settlement
Relation with crisis: the measures which Argentina
took during its financial crisis (devaluation etc.) have
been disputed by many investors = more than 30
cases before ICSID which might cost Argentina more
than US$ 80 bn if it looses all the cases.
GATS
problematic aspects of how the financial services are being dealt with:






Liberalisation of risky and unstable financial services
Deregulation rather than securing proper regulation
Attacking prudential regulations
Uncontrolled liberalisation
GATS liberalises capital flows [1], [2]
GATS undermines undemocratic processes and
meeting the needs of societies
The reason why the GATS agreement and GATS negotiations are so imbalanced to the interests of the financial services industry is because they are heavily
influenced by the financial services lobby. This financial lobby is behind the proposal during the Doha Round the GATS negotiations on domestic
regulation to include a rule whereby foreign service suppliers should be allowed to give comments before legislation is adopted in parliament. However,
foreign companies already have much influence on legislation in host countries. The new GATS rules would not provide guarantees, regulation or means
to protect that other stakeholders in the host country such as customers, workers etc.
[1] Art. XI to GATS: also applies to any services sector whose liberalization is being committed under the GATS agreement.
[2] Art. XVI , foonote 8: also applies to any services sector whose liberalization is being committed under the GATS agreement.
FTAs
 Free trade agreements (FTAs) result in more unrestricted
capital flows and financial services :
 GATS ‘plus plus’
 EU wants to include international standards in FTAs,
which are not negotiated by developing countries
 Worrying restrictions to control capital flows:
■ prohibit restrictions on all payments for current transactions between residents of
the signatory countries,
■ prohibit restrictions on the free movement of capital relating to direct investments
with regard to transactions on the capital account of balance of payments,
■ to require that measures ensuring the integrity and stability of a Party's financial
system shall not be more burdensome than necessary to achieve their aim, and
shall not discriminate against financial service suppliers of the other Party in
comparison to its own like financial service suppliers,,
■ to limit the ways safeguard measures with regard to capital movements can be
taken: only “in exceptional circumstances” when payments and capital
movements between the Parties cause or threaten to cause serious difficulties for
the operation of monetary policy or exchange rate policy in one or more [signatory
States]; and only those safeguard measures with regard to capital movements
“that are strictly necessary may be taken” for a period not exceeding six months.
POLICIES:
SOME CRISIS RISKY STRATEGIES
Lisbon Strategy and “Global Europe – competing in the
world”
= strategy supporting competitiveness and world wide
expansion of European banks and their financial products
and operations
 lobby against too costly regulations and supervision
 incentive to allow banks / financial conglomerates to
become larger and larger
 competing regulators and supervisors to makes a
country’s financial industry and financial markets most
profitable
= lack of cooperation and supervision on cross border
financial conglomerates
CURRENT MEASURES PROPOSED within EU
 Increasing capital requirements for banks (reserves)
 Enhancement and EU harmonisation of deposit guarantee
system
 Regulation of credit rating agencies
 Tackling (too high) remuneration that leads to too much risk
taking by management
 Clarification of state aid
 Improving cross-border financial conglomerates
 Improving transparancy and reporting by financial services
providers
 Changing accounting standards so as to avoid too much
changing of value of assets
 Enhancing requirements for securitisatio
EU INSTITUTIONS
 EU has a mandate to regulate not to supervise
 The ECB has no mandate to supervise but has
advisory role on regulation in different Council, EC
and EP bodies
 The ECB has the mandate to ensure capital flows and
in preserving financial stabilit, in cooperation with the
European System of Central Banks (ESCB) which is
composed of the ECB and of the central banks of all
the EU member states
 The Eurogroup dealing with the EU meets separately
EU DECISION MAKING
ON EU REGULATION
 The EC (DG Markt) has mandate to propose a regulatory
measure (Directive or Regulation), in practice often after
discussions at Council but seldom after a report by the EP
 The Council of Ministers of Finance (ECOFIN, assisted by
Economic and Financial Committee (EFC)) and EP have codecision powers on the proposed regulation
 The EC is responsible for transposition and implementation by
the member states
 EC is assisted by different Committees with representatives from
member states and ECB, and by many expert consultations
mainly composed by business
 DG Competition has not fully intervened to prevent financial
conglomerates to become ‘ too big to fail’  bail outs necessary
 has to decide whether not illegal state aid
Advisory bodies with member state
representatives, in the Lamfalussy process
 Regulatory committee or Level 2 Committees:
■ European Banking Committee (EBC)
■ European Insurance and Operational Pensions Committee
(EIOPC)
■ European Securities Committee (ESC)
 Committee of Supervisors or Level 3 Committees:
■ Committee of European Banking Supervisors (CEBS)
■ Committee of European Insurance and Occupational Pension
Supervisors (CEIOPS)
■ Committee of European Securities Regulators (CESR)
PROBLEM:
IMPLEMENTATION AND SUPERVISION
 EU member states do not always properly implement (transpose)
EU regulation
 EU member states have mandate of supervision, which not
always do supervision properly or do not take into account EU
dimension
 No proper transborder supervision of transborder financial
conglmerates in different EU member states
> Competition among member states to support their financial
industry  weakens regulation and supervision
> Different traditions, legislation and structures of supervision
Problem of cooperation
 Voluntary MoU between supervisors
 Since 1 June 2008, there has been a voluntary
Memorandum of Understanding on cooperation
between the financial supervisory authorities, central
banks and finance ministries of the Euroopean Union
– on cross border financial stability: signed by 118
institutions in 27 EU member states and by the ECB
 not abided by during September 2008 crisis
> Competition among member states to support their
financial industry
 Developing countries have problems to address the
supervisors of EU financial conglomerates
EU ROLE IN THE WORLD
 Aggressive agenda to liberalise financial services and
capital movements in developing countries through
GATS and FTAs, without caring about sufficient
regulation and supervision
> DG Trade
 Member states not represented as a single body or by
all individual member states in international standard
setting bodies, and forums discussing financial
stability such as FSF, G-20
 ….
IMPACT OF EU POLICIES,
REGULATORY & SUPERVISORY
STRUCTURE
 Too much competition among member states leads to too weak
regulation and supervision
 Credit crisis and buying & selling of risky products, which affects
developing countries
 Conflict of interest in EU with impact among the world: making EU
financial industry competitive by becoming larger, expanding in
developing countries with risky behaviour, while not guaranteeing due
regulation and supervision
 Too much influence by resourceful financial industry lobby, and too little
monitoring and interference by civil society and parliaments.
 too little concerns about access by poorer clients, sustainability of
financing and impact on developing countries (e.g. lack of regulation of
credit rating agencies