INTERNATIONAL BANK
REGULATION
Shwetambari Heblikar
Kyle Briggs
BANK FAILURE
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When unable to meet its obligations to its depositors
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“Run on the bank” (Depositors withdraw from bank)
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Loans not repaid, Liquidity, Assets/Liabilities unbalanced,
ect.
Assets believed to decline in value
Even if assets are sound, negative expectations may
lead to financial panics

Effects travel through financial system
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One bank’s 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
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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)
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Losses up 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)

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Borrow from Fed’s discount window
INTERNATIONAL BANKS
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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
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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 committee’s work has been to close gaps in
international supervisory coverage in pursuit of 2 main principles:
1.
2.
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No foreign bank can escape supervision.
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.
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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 Committee’s 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
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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
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Banks can shift jurisdictions
US regulations are diminished due to offshore banking.
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No deposit insurance.
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US can set requirements for its overseas branches, but one
country cannot solve this alone. Countries can’t agree on level of
reserve requirements.
National governments don’t watch foreign branches closely

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National deposited insurance is too small to cover the large
deposits in international banks.
No reserve requirements

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Countries compete for banks by keeping regulations low
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
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Emerging economies

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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