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 about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article
 

External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts