Blog Post

Cooperation between home and host countries on the supervision of multinational banking groups

With regard to oversight of multinational banks, supervisory authorities in home countries used to play a greater role than those in host countries. However, the recent global financial crises underlined the need for more intervention by host countries. As a host to many multinational banking groups, the Korean government needs to inspect whether there are regulatory loopholes in financial supervision, and to make greater efforts to strengthen global-level cooperation.

By: Date: December 12, 2012 Topic: Banking and capital markets

With regard to oversight of multinational banks, supervisory authorities in home countries used to play a greater role than those in host countries. However, the recent global financial crises underlined the need for more intervention by host countries. As a host to many multinational banking groups, the Korean government needs to inspect whether there are regulatory loopholes in financial supervision, and to make greater efforts to strengthen global-level cooperation.

The bankruptcy of the German bank Herstatt, in 1974, highlighted the need for international cooperation in supervising multinational banks. At the time, the German supervisory authorities started the bank’s bankruptcy proceedings after the local market closed for the day, but, it upset the global FX market as the bank failed to make settlements worth $600 million in the New York market which was still open. The term, Herstatt risk, came from this episode which refers to a counterparty risk associated with FX settlements. Immediately afterwards, central bank governors of the G10 countries formed the Basel Committee for Banking Supervision (BCBS) for the better coordination on banking oversight.

The BCBS issued the Basel Concordat in 1975, a guideline on the collaboration between home and host countries over banks’ overseas operations. Its main purpose was to ensure effective supervision without regulatory blind spots, and as such, it promoted information sharing between home and host countries’ supervisory authorities. In 1983, the Committee revised the Concordat and gave a mandate to a home country for the worldwide consolidated supervision. It put together supervision criteria in 1992, emphasising the home country’s information-collection right. These changes followed several banking scandals in which multinational banks (eg Italy’s Ambrosiano bank in 1982, and Luxembourg’s BCCI in 1991) moved their operations to tax havens or other loosely regulated places to circumvent supervision in their home countries.

However, the recent global financial crises and the collapse of Lehman Brothers underscored the importance of more active intervention by host countries. When large multinational banking groups go bankrupt, the shock spreads to their subsidiaries and branch offices in the host countries. As the Concordat was made during the time when banks’ overseas operations had much less influence on both home and host countries, ‘systemic risks’ were hardly taken into account. If a bank’s offshore business is not as systemically important in the home country as in the host country, the former would be reluctant to share information with the latter (see Table 1). Further, if the business of a multinational bank deteriorates, the home country is likely to conceal related information in case the host country ringfences the local branches to block out the adverse effects.

Cooperation between home and host countries on the oversight of multinational banks continues to be a controversial issue because of the financial trilemma among the conflicting policy goals: free cross-border banks, global financial stability, and national authorities. To break the impasse, the euro-area countries are considering a universal approach of forming a banking union, forgoing the national authorities. Conversely, a territorial approach may be considered to strictly ringfence business of local branches from that of the headquarters, which would deter free cross-border banking activities. Between these two extreme scenarios, countries are exploring how to gradually deepen cooperation through stronger supervisory colleges, elimination of legal barriers, and better incentive systems. Also, it is important to clarify bankruptcy proceedings for G-SIFIs to further promote cooperation between supervisory authorities in both home and host countries.

Against this background, Korea, as a host country of many multinational banks, needs to check for regulatory loopholes in banking oversight, and work closely with authorities of home countries to share information. Last but not least, the Korean government needs to voice its opinions more clearly in global discussions on the issue of regulating G-SIFIs to promote the perspectives of the emerging economies.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Opinion

COP26: why carbon pricing is crucial to China’s climate change pledges

China’s emissions trading scheme is a welcome but to reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon.

By: Alicia García-Herrero and Junyu Tan Topic: Global economy and trade, Green economy Date: October 22, 2021
Read article
 

External Publication

European Parliament

Don't let up - The EU needs to maintain high standards for its banking sector as the European economy emerges from the COVID-19 pandemic

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Rebecca Christie and Monika Grzegorczyk Topic: Banking and capital markets, European Parliament Date: October 21, 2021
Read article More on this topic More by this author
 

Blog Post

Better sustainability data is still needed to accelerate the low-carbon transition in capital markets

Investors need more trustworthy sustainability data. Regulators should leave space for better products to emerge, while remaining alert to well-known patterns of misconduct in capital markets.

By: Alexander Lehmann Topic: Banking and capital markets Date: October 18, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Will ‘common prosperity’ address China’s inequality?

Why is China reviving this old mantra?

By: The Sound of Economics Topic: Global economy and trade Date: October 13, 2021
Read article More by this author
 

Opinion

European governance

The inconsistency in global strategic relations

All of this talk on strategic retrenchment and autonomy is the language of escalation, not of appeasement and collaboration.

By: Maria Demertzis Topic: European governance, Global economy and trade Date: October 13, 2021
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article
 

Opinion

Will China use climate change as a bargaining chip?

Beijing shows signs of changing tactics ahead of the COP26 conference.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 6, 2021
Read article More on this topic More by this author
 

External Publication

A world recovery fund to overcome developing countries’ post-covid debt woes?

Proposal to set up a World Recovery Fund (WRF), aimed at addressing some of the key problems with the design of the DSSI and more generally the existing international financial architecture for dealing with debt problems in the developing world.

By: Alicia García-Herrero Topic: Global economy and trade Date: October 6, 2021
Read about event More on this topic
 

Past Event

Past Event

What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Date: October 5, 2021
Load more posts