International Banking: Strengthening the Framework for Supervising
International Banks (Chapter Report, 03/21/94, GAO/GGD-94-68).
Although international banking has grown and become the foundation for
the global economy, no one regulator oversees international banks to
ensure the safety and soundness of the entire system. In each country,
bank supervisors are responsible for the quality of their supervision
efforts but coordination with supervisors in other nations is purely
voluntary. This report (1) reviews efforts by the Basle Committee on
Banking Supervision, the principal mechanism by which regulators work to
coordinate banking supervision; (2) assesses the effectiveness of the
committee's approach and the extent to which the committee is pursuing
options to bolster its role; and (3) analyzes whether the U.S. Foreign
Bank Supervision Enhancement Act of 1991 can be one model for
implementing into national law the Basle committee standards to promote
adequate international banking supervision.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-94-68
TITLE: International Banking: Strengthening the Framework for
Supervising International Banks
DATE: 03/21/94
SUBJECT: Banking regulation
International cooperation
International agreements
Financial institutions
Foreign governments
Bank management
International economic relations
Capital
Banking law
IDENTIFIER: Latin America
Canada
Africa
Asia
Caribbean
Switzerland
European Community
China
Belgium
Sweden
France
Germany
Italy
Japan
Luxembourg
Netherlands
United Kingdom
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Cover
================================================================ COVER
Report to Congressional Committees
March 1994
INTERNATIONAL BANKING -
STRENGTHENING THE FRAMEWORK FOR
SUPERVISING INTERNATIONAL BANKS
GAO/GGD-94-68
International Banking
Abbreviations
=============================================================== ABBREV
BCCI - Bank of Credit and Commerce International
BIS - Bank for International Settlements
BNL - Banca Nazionale del Lavoro
EC - European Community
FBSEA - Foreign Bank Supervision Enhancement Act
FDIC - Federal Deposit Insurance Corporation
GAO - General Accounting Office
IML - Institut Mon�taire de Luxembourg
IOSCO - International Organization of Securities Commissions
OCC - Office of the Comptroller of the Currency
OECD - Organization for Economic Cooperation and Development
Letter
=============================================================== LETTER
B-253938
March 21, 1994
The Honorable Henry B. Gonzalez, Chairman
The Honorable James A. Leach
Ranking Minority Member
Committee on Banking, Finance and
Urban Affairs
House of Representatives
The Honorable Donald W. Riegle, Jr., Chairman
The Honorable Alfonse M. D'Amato
Ranking Minority Member
Committee on Banking, Housing and
Urban Affairs
United States Senate
We evaluated U.S. and international efforts to increase
international coordination and improve the overall quality of bank
supervision worldwide. This report was prepared pursuant to GAO's
statutory authority, not at the Committees' request.
We are sending copies to the Chairman of the Board of Governors of
the Federal Reserve System, the Comptroller of the Currency, and the
Chairman of the Federal Deposit Insurance Corporation. We will also
make copies available to other interested parties upon request.
Please contact me on (202) 512-4812 if you or your staff have any
questions concerning this report. The major contributors to this
report are listed in appendix V.
Allan I. Mendelowitz, Managing Director
International Trade, Finance,
and Competitiveness
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
While international banking has grown and become the foundation for
the global economy, no one regulator oversees international banks to
ensure the safety and soundness of the entire system. In each
country, bank supervisors are responsible for the quality of their
supervisory efforts but their efforts to coordinate with supervisors
in other nations are purely voluntary.
To evaluate the progress toward improving the quality of
international bank supervision and coordination, GAO (1) reviewed the
efforts by the Basle Committee on Banking Supervision, the principal
mechanism by which regulators work to coordinate banking supervision;
(2) assessed the effectiveness of the committee's approach and the
extent to which the committee is pursuing further options to enhance
its role; and (3) analyzed whether the U.S. Foreign Bank Supervision
Enhancement Act of 1991 can be one model for implementing into
national law the Basle committee standards to promote adequate
international banking supervision.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
Cross-border banking is expanding as the number, size, types of
activities, and organizational complexity of international banks
increase. While these cross-border linkages generally bring
efficiencies to the world's capital markets, they also increase the
difficulty of ensuring effective supervision and, in the extreme, may
add to systemic risk, whereby losses in one banking group can infect
the entire financial system. Moreover, the stringency of national
regulation varies considerably. There are differences among nations
in their requirements for audit, internal control, and corporate
governance standards. Also, due to the global nature of banking,
problems of a multinational bank can spill over into other markets.
Created in 1974 under the auspices of the Bank for International
Settlements in Basle, Switzerland, the Basle Committee on Banking
Supervision is the main forum for central bankers and supervisors to
reach agreement on how best to supervise international banks. The
committee is an informal group, and adherence to its principles is
voluntary. Its members meet several times a year and consist of
senior representatives of bank supervisory authorities and central
banks from Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States.
In the United States, the Foreign Bank Supervision Enhancement Act of
1991 (P.L. 102-242) gives the Federal Reserve Board greater
supervisory powers over foreign banks in this country. These new
powers include heightened scrutiny of applications by foreign banks
establishing U.S. offices and, in particular, a mandate to give
greater attention to how regulators in a foreign bank's home country
supervise their banks.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Although bank supervisors, working through the Basle Committee's
voluntary approach, have set recognized standards that led to
improved bank supervision and increased bank capital, they believe
that recent international banking problems demonstrate the need for
better assuring adherence to the committee's supervisory standards.
The committee is considering options for achieving better adherence,
while recognizing and preserving individual nations' sovereignty over
their banking systems. Such options include establishing a
clearinghouse for national supervisory practices and facilitating
peer reviews among national supervisory regimes.
Since GAO found little precedence or support for creating a strong,
supranational regulatory body, or for giving the Basle Committee any
formal authority, it believes these other options offer important
benefits. Complete and consistent information on national
supervisory practices would allow national authorities to make better
decisions on permitting foreign bank operations in their countries,
while avoiding costly duplication of efforts. Such information could
also serve to gauge national supervisors' progress toward
implementing Basle Committee standards. Peer reviews have, in a
variety of settings, provided for more rigorous assessment of
regulatory practices through self-monitoring, without creating a
separate regulatory authority.
The Foreign Bank Supervision Enhancement Act could be one model of
how nations might implement into law the principles espoused by the
Basle Committee. While the act was the U.S. response to the real
and potential problems of supervising its foreign banks, its
provisions address issues addressed by the committee, including
reliance on effective consolidated supervision of international banks
by their home regulators.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
THE BASLE COMMITTEE'S
PROGRESS IN IMPROVING
INTERNATIONAL BANK
SUPERVISION
-------------------------------------------------------- Chapter 0:4.1
The Basle Committee has contributed in several ways to improving the
standards for international banking. Its 1988 Capital Adequacy
Accord provided a framework for strengthening the capital position
(i.e., the amount of money banks must hold to back up their assets)
of banks worldwide, leaving the banking system better able to
withstand potential financial shocks. The accord has been fully
implemented by all committee member countries, and nonmember
countries with a significant international banking presence have
either adopted or are working to adopt the accord. Further,
adherence to the accord has resulted in a buildup of banks' capital
funds, in many cases in excess of the suggested standard (see pp.
27-8 and 37-8).
In its June 1992 Minimum Standards for the Supervision of
International Banking Groups and Their Cross-Border Establishments,
the committee provided a framework to improve supervision of
international banks. It reinforced the principle that no
international bank should operate without being subject to
"consolidated supervision"--effectively monitoring the worldwide
activities of international banks with a current, complete, and
accurate picture of all parts of the bank's operations. Through the
standards, the committee in particular (1) addresses the need to
designate clearly and assign responsibilities to a lead supervisor
over complex entities and (2) reformulates its principles into
minimum standards. Of significance is the committee's intent to
monitor members' progress in implementing the minimum standards and
to assess the standards for further refinements; and its call for
bank supervisors to apply Basle Committee principles in practice,
including having the capability of performing consolidated
supervision (see pp. 32-3).
NEED FOR GREATER ADHERENCE
TO STANDARDS RECOGNIZED
-------------------------------------------------------- Chapter 0:4.2
While the Basle Committee's informal approach to formulating and
presenting its initiatives has worked well, its members recognize a
need for greater adherence to the committee's standards. The
committee relies on acceptance of common international standards
rather than on binding legal authority. It counts on countries to
adopt and implement its principles voluntarily. Many countries,
beyond those represented on the committee, adopted the 1988 Capital
Adequacy Accord, for instance. The informal structure encourages the
frank exchange of views, facilitates consensus, and provides valuable
guidance on improving international banking supervision (see pp.
38-40).
However, the recent failure of the Bank of Credit and Commerce
International, seized by regulators around the world in July 1991,
demonstrates the need for a supervisory framework that better ensures
effective bank regulation. This case showed that bank supervisors
have not fully implemented Basle Committee calls to ensure that (1)
banks are supervised on a consolidated basis, (2) a capable lead
supervisor is identified, and (3) information about the bank's
potential problems is readily shared among supervisors (see pp.
40-42).
The committee addressed the need for carrying out its initiatives
more consistently by reformulating its "best practices" into more
forceful Minimum Standards and pledging to monitor their
implementation, with room for later refinements. But the committee
does face several constraints to improving the quality of supervision
through its Minimum Standards: (1) the minimum standards are fairly
general; (2) they must not only be adopted but also applied capably;
and (3) supervisory practices vary among countries, while supervisors
lack adequate information about the extent to which their colleagues
follow Basle Committee principles. Basle Committee members believe
the committee must continue to rely on moral suasion rather than
legal authority to encourage adoption of its standards and monitor
their implementation (see pp. 42-7).
Some committee representatives and experts have examined the
feasibility of a clearinghouse for worldwide supervisory practices or
of peer reviews to assess member countries' progress in adopting
Basle committee standards. A clearinghouse could provide supervisors
with complete and consistent information on worldwide supervisory
practices, help them make better decisions on foreign bank operations
within their jurisdictions, and avoid costly duplication of effort.
Peer review, whereby teams of experts from member countries assess
other member countries, has several advantages, GAO believes.
Facilitating exchanges of information would allow countries to see
progress in meeting the standards without creating a new regulatory
body (see p. 47).
THE FOREIGN BANK SUPERVISION
ENHANCEMENT ACT IS A
POSSIBLE MODEL
-------------------------------------------------------- Chapter 0:4.3
In the United States, the Foreign Bank Supervision Enhancement Act of
1991 was enacted to improve the supervision of foreign banks.
Neither its intent nor the Federal Reserve Board's mandate for its
implementation includes improving international supervision
worldwide, nor promoting the Basle Committee's Minimum Standards.
However, to the extent that the act's standards are consistent with
the Minimum Standards, the act can be seen as one model for how to
improve international banking supervision at the national level in a
manner consistent with Basle committee principles. (See p. 52.)
The Foreign Bank Supervision Enhancement Act contains a major
principle the Basle committee reemphasized in its Minimum
Standards--consolidated supervision. The act requires that the
Federal Reserve Board base approval for the establishment in the
United States of a foreign branch or agency on its determination that
the foreign bank applicant is subject to comprehensive, consolidated
supervision by its home country supervisor. The Basle Committee's
Minimum Standards contain a similar but less stringent requirement,
giving the host supervisor limited discretion to approve an applicant
not subject to consolidated supervision (see pp. 58-60).
RECOMMENDATION
---------------------------------------------------------- Chapter 0:5
In order to strengthen supervision of international banks worldwide,
it is necessary to ensure stricter application of the principles
espoused by the Basle Committee on Banking Supervision. Therefore,
GAO recommends that the Chairman of the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, and the
Chairman of the Federal Deposit Insurance Corporation, in
consultation with their colleagues on the Basle Committee, seek an
expanded role for the committee without the imposition of a new legal
framework or interference with national sovereignty.
For instance, U.S. supervisors could work with other Basle Committee
member supervisors to encourage and monitor progress toward adoption
of the committee's Minimum Standards by expanding its role as a
clearinghouse for information on supervisory practices. In addition,
the committee could facilitate a peer review process for bank
supervisors desiring such reviews, providing guidance for the conduct
of these reviews, and writing guidelines for ensuring the
confidentiality of supervisory information. In the peer reviews, the
supervisors would be assessed by evaluating their compliance with the
Basle Committee's Minimum Standards. Peer review reports could form
the basis for bank supervisors to strengthen their procedures. As
participants gain experience and refine the process over time, peer
review might be instituted as a standard component of supervisors'
efforts to strengthen the framework for international bank
supervision.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
The Federal Reserve Board, the Federal Deposit Insurance Corporation,
and the Office of the Comptroller of the Currency provided written
comments on a draft of this report, which have been presented and
evaluated in chapters 3 and 4 (see pp. 49-51, 60-1, and app. III).
The comments are reprinted in appendixes II through IV. The Federal
Reserve Board and the Federal Deposit Insurance Corporation generally
supported the overall conclusions of the report and the
recommendation that the Basle Committee seek an expanded role to
ensure application of its principles. The Office of the Comptroller
of the Currency agreed that more can be done to enhance global bank
supervision. However, the Office of the Comptroller of the Currency
was concerned that the Basle Committee's limited membership could
restrict its effectiveness as the main vehicle for improving
coordination of international bank supervision. The Comptroller of
the Currency was also concerned that it may be too soon to suggest
the Foreign Bank Supervision Act as a model for implementing
international standards.
GAO agrees that coordination of international bank supervision should
go beyond the Basle Committee's limited membership, but, because the
committee's 1988 capital adequacy accord has been widely implemented,
GAO continues to believe that the committee currently is the
principal forum for coordinating international banking supervision.
GAO based its conclusion that the Foreign Bank Supervision
Enhancement Act can serve as a model for implementing international
standards on the act's shared objectives with the Basle Committee and
on their similar criteria in approving foreign bank applications.
INTRODUCTION
============================================================ Chapter 1
The expanding number, changing nature, and increasing complexity of
international banks has brought to the forefront the need for
effective coordination of international banking supervision. This
need is particularly important, because although banking operates
worldwide, no supranational regulator exists to monitor all
international banks. Banks are locating operations in foreign
markets or offering cross-border services whereby the lending bank
and the borrower reside in different countries. They are conducting
an array of activities that, for some of them, includes providing
investment banking, insurance, leasing, mutual funds, and
derivatives,\1 as well as traditional commercial banking, through
complex organizations known as "financial conglomerates." The
resulting linkages among different markets and types of financial
services mean that difficulties in one country's banking system can
adversely affect the banking systems in other countries and, in the
extreme, the worldwide banking system. In addition, because the
stringency of national regulation varies and banking is global,
problems experienced by a multinational bank in a less-regulated
market can affect well-regulated markets.
Concern about the need to improve worldwide banking supervision was
heightened with the July 1991 closure by regulators of the Bank of
Credit and Commerce International (BCCI) and by problems with the
Rome, Italy-based Banca Nazionale del Lavoro's (BNL) Atlanta,
Georgia, branch. According to authorities investigating the case,
BCCI evaded adequate supervision with a complex organizational
structure, and both banks conducted fraudulent accounting and
bookkeeping schemes.
In addition, banks are increasingly using new financial instruments
to diversify their earnings and enhance their profits. While no
consensus exists about the extent to which these activities represent
adverse risk, banking regulators generally agree that monitoring
these financial instruments will be a challenge requiring close
international coordination.
Finally, coordination of international banking supervision promotes a
more efficient and active marketplace. It gives market participants
and consumers a sense of confidence that, in the absence of a
supranational bank regulator, the system can withstand systemic
shocks. Banks and other financial institutions are more likely to
establish foreign operations and provide cross-border services, and
consumers are more likely to utilize them, if both parties can be
reasonably assured that supervisory practices and regulations are
being coordinated worldwide.
--------------------
\1 Derivatives are financial contracts whose value depends on the
values of one or more underlying assets or indexes of asset values.
THE NATURE OF INTERNATIONAL
BANKING
---------------------------------------------------------- Chapter 1:1
Banks have set up operations outside their own borders and engaged in
cross-border banking for various reasons. First, advances in data
processing and telecommunications have made it easier for banks to
offer global services without establishing a physical presence in
several markets. Second, the liberalization of restrictions on
capital flows across country borders has increased international
lending and deposit-taking activities. Third, the desire to reduce
risk has led banks to diversify their earnings sources among several
countries so that in any given year, an inadequate investment outcome
in one country may be offset by a satisfying investment outcome in
another country. Finally, banks' use of innovative financial
instruments to diversify their earnings has also increased
international banking activity.
Table 1.1 demonstrates the extent to which banks are operating
worldwide. Among those banks with over $1 billion in tier 1
capital,\2 table 1.1 shows that, as of December 31, 1990, 15 banks
held over 40 percent of their assets outside of their home country of
operation.
Table 1.1
The 15 Most Active International Banks
by Percentage of Overseas Business as of
December 31, 1990
Percentage of
overseas
Banks Home country business\a
------------------------ ---------------- ----------------
Hong Kong and Shanghai United Kingdom 78.1
Bank Holdings
Standard Chartered Bank United Kingdom 63.7
Union Bank of Switzerland 57.7
Switzerland
Swiss Bank Corporation Switzerland 53.1
Credit Suisse Switzerland 52.4
Bankers Trust United States 50.6
Republic New York United States 47.7
Bank of China China 47.1
Paribas France 45.9
Banque Indosuez France 45.0
National Westminster United Kingdom 44.3
Bank
Banque Nationale de France 43.8
Paris
J.P. Morgan United States 43.4
National Australia Australia 42.5
Bank\b
Citicorp United States 40.6
------------------------------------------------------------
\a "Overseas" business refers to the percent of assets banks hold
outside their home country.
\b Data for the National Australia Bank are as of September 30, 1990.
Source: The Banker (Feb. 1992).
--------------------
\2 See chapter 2 for an explanation of tier 1 capital according to
the Basle Committee standards. The table is taken from a survey by
The Banker of 68 banks with over $1 billion in tier 1 capital. These
banks are also at present doing business in at least three
cities--London, Tokyo, and New York.
FOREIGN BANKING IN THE
UNITED STATES
-------------------------------------------------------- Chapter 1:1.1
Over the past 6 years, foreign banks, that is, banks whose head
offices are located outside of the United States, have increased
their U.S. presence. From year-end 1987 through year-end 1992,
assets of foreign banks operating in the United States increased by
more than 38 percent, from approximately $628 billion to
approximately $867 billion, which represented 22 percent of total
U.S. banking assets in 1992.\3
Breaking these foreign assets down by region, figure 1.1 shows that
in 1992, banks from Asia and Europe accounted for more than 89
percent of the $867 billion of foreign bank assets in the United
States. The assets held by Japanese banks accounted for almost 50
percent of the assets held by foreign banks.
Figure 1.1: Assets Held by
Foreign Banks in the United
States by Region as of December
31, 1992
(See figure in printed
edition.)
Source: Board of Governors of the Federal Reserve System.
--------------------
\3 This figure does not include "edge" or "agreement" corporations or
U.S. offices of Puerto Rican banks. Edge or agreement corporations
are generally limited to international banking and cannot accept
deposits from U.S. residents or businesses unless the deposits are
directly linked to international trade.
U.S. BANKING ABROAD
-------------------------------------------------------- Chapter 1:1.2
Not only do foreign banks have a significant presence in the United
States, but U.S. banks also conduct considerable operations
overseas. From year-end 1987 to year-end 1992, U.S. banking assets
booked in overseas offices grew steadily from approximately $162.4
billion to approximately $538.5 billion, an increase of almost 232
percent. Delineating these assets by region, figure 1.2 shows that
in 1992, overseas offices in Asia, Europe, and the Caribbean
accounted for almost 87 percent of the $538.5 billion of U.S. assets
held abroad.
Figure 1.2: Assets of U.S.
Banks' Overseas Offices by
Region as of December 31, 1992
(See figure in printed
edition.)
Note: Numbers may not add up due to rounding.
Source: Board of Governors of the Federal Reserve System.
INTERNATIONAL BANKING
INSTITUTIONS ARE COMPLEX
ORGANIZATIONS
---------------------------------------------------------- Chapter 1:2
Financial institutions have become increasingly complex organizations
that offer a wide array of financial services. This complexity
presents a challenge to supervisors, who must oversee not only
banking functions but also other activities. Financial conglomerates
are integrated groups of companies that offer a broad range of
financial services, including traditional banking. Examples of the
nonbanking services some financial conglomerates provide include
insurance, securities brokerage, and securities underwriting
activities and leasing.\4 The potential benefits to these
organizations may have been increased market share, diversification
of risk through expansion into nonbanking activities, better access
to capital markets, and the consolidation of functions for more
efficient operations.
While conglomerates offer the benefits of diversified assets, risks,
and sources of earnings, their structures pose several problems for
supervisors. Banking experts and supervisors with whom we spoke told
us that supervision of financial conglomerates is an area of primary
concern. One foreign official said that the primary need for
studying financial conglomerates is to develop a standard that
addresses the degree of transparency within the organization and the
placement of overall supervisory responsibility.\5 There are also
concerns about the adequacy of the management information systems and
controls, particularly whether these are sufficient to warn
supervisors and bank management of impending problems. The Federal
Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242,
105 Stat. 2236, 2286-2305) mandated improvements in these areas for
U.S. banks.
One problem with conglomerates is the possibility of encountering
"contagion," whereby losses in one activity may reduce the capital
available to support other parts of the group or whereby visible
difficulties in one area may affect confidence in other areas.
Another problem is the risk that the capital of the group may be less
than the sum of the capital in the operating affiliates.\6 Other
problems include the risk that losses will be allowed to continue in
one part, effectively subsidized by profits in other parts of the
conglomerate; the risk of intragroup exposures, whereby members of
the group have direct or indirect claims on each other; the risk of
conflict of interest when the shareholders of the group are also
customers of the group, potentially damaging the reputation of the
entire group; and the risk of dispersion of control, which can be a
deliberate act to conceal from supervisors where the controlling
authority of the group resides.
--------------------
\4 This discussion is limited to financial conglomerates and does not
cover other types of conglomerates that may contain significant
commercial or industrial interests in some part of the corporate
structure.
\5 "Transparency" is defined as the bank supervisor's ability to
obtain information about a financial conglomerate's total operations,
including the parent holding company and its subsidiaries.
\6 According to a paper drafted by the Basle Committee, it is
essential that the parent company in a financial conglomerate and its
shareholders be a source of strength to the rest of the group. The
capital base of the parent company should be at least as large as the
capital required by the supervisors and regulators of each of the
companies under the parent. The Basle Committee paper recommended
that the group structure should not allow the same capital to be used
more than once.
RECENT EVENTS CONCERNING TWO
INTERNATIONAL BANKS
---------------------------------------------------------- Chapter 1:3
Based on our review, the problems involving BCCI and BNL reenforce
the need for an effective international system for supervising
international banks. BCCI, whose organizational structure became
increasingly complex, was established as a bank that would compete
with banks of the West but serve primarily third-world countries.
Throughout the 1970s, BCCI expanded its structure rapidly by adding
new corporate members. BCCI was originally incorporated in only one
location, Luxembourg. Two years later, a holding company was
created, BCCI Holdings. Its subsidiary bank, BCCI S.A., was split
into two parts: BCCI S.A., with head offices in Luxembourg; and BCCI
Overseas, with head offices in the Grand Cayman Island. Luxembourg
was used mostly for BCCI's European and Middle East locations, and
the Grand Cayman mostly for third-world countries outside of the
Middle East. For the purpose of this report, we will refer to the
three BCCI-related entities collectively as "BCCI." The structure is
shown in figure 1.3.
Figure 1.3: The Bank of Credit
and Commerce International's
Organizational Structure
(See figure in printed
edition.)
Source: Richard Dale, International Banking Deregulation - The Great
Banking Experiment (Cambridge: Blackwell Publishers, 1992) p. 200.
The corporate structure established by BCCI had the effect of
minimizing close supervision of the full range of its operations and
allegedly enabled it to avoid detection of its true operations and
condition for almost 2 decades. For example, BCCI could remove
transactions from the accounts of one subsidiary and place them on
the accounts of BCCI units in other countries, thereby shielding
these activities from supervisory review and external audit.
While BCCI allegedly evaded supervision through its complex
organizational structure, BNL-Atlanta allegedly maintained two sets
of books to avoid discovery of its illegal activities. BNL, Italy's
largest bank--with more than $100 billion in assets worldwide-- has
offices throughout the world. BNL is 96-percent owned by the Italian
government; it maintained an office in Atlanta--BNL-Atlanta. The
agency office in Atlanta had no facilities for accepting deposits or
conducting cash or checking transactions for customers. It was
authorized only to conduct limited financing for large commercial
customers located in nine southern states.
The Georgia Department of Banking and Finance handled primary
oversight and licensing responsibilities. BNL-Atlanta was also
subject to certain federal regulations and federal supervision.
Specifically, BNL-Atlanta had to comply with Federal Reserve
requirements to report information concerning its assets,
liabilities, contingent liabilities, and country risk exposure--or
the amount of money the agency was lending to other countries. The
Federal Reserve also conducted limited annual examinations at
BNL-Atlanta, usually covering portions of its international banking
operations not reviewed by the Georgia authorities.
BNL-Atlanta allegedly approved as much as $4 billion in secret and
unauthorized financing to Iraq. Some officials of BNL-Atlanta
allegedly concealed their unauthorized financing to Iraq by
fabricating and falsifying the branch's official accounts;
maintaining a secret set of "grey books" that they kept on separate
computers and in boxes that they stored outside of the branch; making
false reports to the bank's management in New York and Rome;
deceiving the bank's internal and external auditors by intercepting
audit confirmations and forging responses to them; and lying to the
federal and state bank examiners in person and in written reports
required to be filed with regulators.
Fraud and deception on the scale alleged in the BCCI and BNL cases
are difficult to detect by regulators and supervisors, who depend on
the reliability of the records they examine. Nonetheless, the lack
of coordinated or thorough oversight in these cases prompted the U.S.
Congress to pass legislation that increases Federal Reserve Board
oversight of foreign banks operating in the United States and
requires greater scrutiny of new foreign bank applications. A full
discussion of this legislation can be found in chapter 4.
SYSTEMIC FAILURE: THE ULTIMATE
FEAR OF SUPERVISORS
---------------------------------------------------------- Chapter 1:4
As banking activities become increasingly global in nature, problems
in one bank or banking group can be detrimental to financial entities
in multiple countries. "Systemic crisis" is a disruption that
severely damages the operation of the financial system either within
a country or across country borders and, at the extreme, causes the
system to break down completely. A typical form of financial crisis
occurs when the sudden failure of a financial institution leads to a
lack of confidence not only in the failed firm, but also in any of
its other financial institutions thought to have similar
vulnerabilities. Investors, in turn, refuse to deal with these other
financial institutions. Creditors demand immediate payment, causing
a liquidity problem not only with the original firm, but also among
its other financial institutions, threatening the entire group's
solvency if the situation is not resolved quickly. Several factors
have increased the potential for systemic failure in international
banking.
Greater linkages exist between various markets as banks interact with
nonbank financial institutions, including investment banks and
insurance companies domestically and across borders. These linkages
increase the potential for problems to spread across a wider range of
institutions and countries. Such linkages are evident as banks deal
more in off-balance-sheet activities,\7 including derivative
instruments. Although derivative instruments are used to reduce risk
through hedging,\8 they sometimes involve complex transactions with
many other individuals and institutions referred to as
"counterparties." Some international finance experts have expressed
concern that failure of one counterparty to honor its commitments may
affect the ability of the other counterparties to honor their
commitments. Opinions differ on whether this action could cause a
systemic crisis.
The task of identifying and evaluating the creditworthiness of
counterparties has been made more difficult by the complexity of the
financial instruments and the multiple markets they affect.
Uncertainty about any one of the counterparties' ability to resolve a
liquidity crisis can cause other counterparties to refuse to lend to
an illiquid but solvent institution, thereby leading to actual
insolvency and failure.
Another trend that potentially increases systemic risk is the greater
degree of concentration of off-balance-sheet activities among a few
large, highly rated firms. This concentration stems from confidence
in the credit standings of these firms, as well as such valid reasons
as the high capital and human investment costs of developing complex
instruments, performing risk management, and utilizing advanced
technological systems. Such concentration also means that the
off-balance-sheet activities of one major firm may affect many market
participants. Thus, problems experienced by that major firm could
entail losses to a greater number of participants than would
otherwise have occurred if exposures had been more spread out.
Other factors that may contribute to the possibility of systemic
failure include regional economic downturns, rapid movement of
problems through automated systems or telecommunication networks,
inappropriately managed risk by financial institutions, and
ineffective crisis management by regulators or governments.
In 1991, the governors of the central banks of the Group of Ten
(G-10)\9 formed a working group to study recent developments in
international interbank relations.\10 The working group concluded
that lessening the chance for systemic failure involves several
actions: ensuring adequate risk management by the individual firm;
improving the legal and institutional framework under which firms
operate domestically and internationally; and promoting continued
communication and cooperation among market participants, central
banks, and other supervisory and regulatory bodies. The goal is to
educate, create common standards, and devise other means to reduce
undue risk to the system. Although there has yet to be a true
"meltdown" of the global financial system, regulators have needed to
be constantly alert to this possibility.
--------------------
\7 "Off-balance-sheet activities" refers to banks' business, often
fee based, that does not generally involve booking assets or
liabilities (i.e., making loans or taking in deposits, respectively).
Examples of off-balance-sheet activities include trading in swaps,
options, futures, and foreign exchange forwards, and granting standby
commitments and letters of credit.
\8 "Hedging" is a strategy used to reduce risk by making purchases or
sales of stocks or currencies that offset existing or anticipated
exposure to a change in market rates.
\9 These countries actually numbered 11 altogether (Belgium, Canada,
France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland,
the United Kingdom, and the United States).
\10 See Recent Developments In International Interbank Relations,
Report prepared by a Working Group established by the Central Banks
of the Group of Ten countries, Bank for International Settlements
(Basle, Switzerland: Oct. 1992).
EFFORTS TO COORDINATE
INTERNATIONAL BANK SUPERVISION
---------------------------------------------------------- Chapter 1:5
As international banking has become more global in scope, banking
supervisors have realized the need to coordinate their efforts to
improve the safety and soundness of both their own banking systems
and those of other financial markets. This coordinated approach to
supervising international banks is useful for several reasons.
First, coordination allows supervisors from different countries to
gain knowledge about the different worldwide supervisory and
regulatory approaches. It also facilitates the development of common
standards to increase the safety and soundness of worldwide banking.
Second, coordination encourages the reduction of competitive
inequalities among the various countries by working toward making the
degree of stringency of supervision more consistent among countries.
Finally, coordination encourages developing effective ways to
exchange information and deal with problems in a timely manner.
Coordination of international bank supervision has evolved through
the efforts of international and regional organizations, as well as
those of national regulators. A principal proponent of this
coordination has been the Basle Committee on Banking Supervision.
In 1974, the central bank governors of the G-10 countries established
the Basle Committee on Banking Regulation and Supervisory Practices,
which is now known as the Basle Committee on Banking Supervision.
The committee's members are senior officials of the central banks and
supervisory agencies of the G-10 and Luxembourg. The committee
operates under the auspices of the Bank for International Settlements
(BIS)\11 in Basle, Switzerland, where it meets 3-4 times a year. BIS
grants the committee's secretariat.
Four bank regulatory officials represent the United States at Basle
Committee meetings--two from the Federal Reserve, and one each from
the Office of the Comptroller of the Currency (OCC) and the Federal
Deposit Insurance Corporation (FDIC). The Federal Reserve has
appointed a senior official in its Banking Supervision and Regulation
Division as its representative. Given the Federal Reserve Bank of
New York's responsibility in money markets, the United States added
the New York bank to its representation on the committee in late
1975. The Federal Reserve Bank of New York sends a senior official
of its foreign banking department to Basle Committee meetings.
The United States added OCC to its representation in 1978. A senior
deputy comptroller has usually been OCC's representative, although on
occasion the Comptroller has attended. In 1984, FDIC became the
third U.S. bank regulatory agency represented at committee meetings.
FDIC is represented at committee meetings by the Executive Director
of its Division of Supervision.
The Basle Committee is an advisory body whose recommendations require
consensus agreement of all its representatives. It has no power to
require implementation of its agreements in the laws or regulations
of its member nations. Instead, it formulates broad supervisory
standards and guidelines. It also recommends statements of "best
practices," expecting that individual countries will implement them
through arrangements that best suit their own national system.
However, U.S. federal bank supervisory agencies, as well as bank
supervisory agencies of other member countries, have committed
themselves to work to implement committee principles.
Various regional organizations have also provided a forum for
discussing and analyzing issues involving international bank
regulation. These regional organizations represent a wide variety of
groups, from country regulators and government officials to private
industry members. The Organization for Economic Cooperation and
Development (OECD) and other groups have also contributed to the
coordination effort but have played a more minor role. These other
groups are discussed in appendix I.
In the United States, Congress enacted the Foreign Bank Supervision
Enhancement Act of 1991 (FBSEA) to improve the supervision of foreign
banks doing business in the United States. The act addresses a
number of issues raised in the various international forums. A full
discussion of FBSEA is contained in chapter 4.
--------------------
\11 BIS is a bank and an international financial institution
headquartered in Basle with three primary roles: it serves as a
forum for promoting international monetary cooperation; it assists
central banks in managing and investing some of their monetary
reserves; and it acts as an agent or trustee for various
international financial settlements.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:6
We initiated this review as part of our basic legislative
responsibility to evaluate U.S. and international efforts to
strengthen the framework for supervising international banks in the
aftermath of the BCCI and BNL cases. Specifically, we
reviewed the efforts by the Basle Committee on Banking Supervision,
the principal mechanism by which regulators have worked to
ensure effective worldwide banking supervision;
assessed the effectiveness of the committee's informal, voluntary
approach and the extent to which the committee is pursuing
further options to enhance its role; and
analyzed whether the U.S. Foreign Bank Supervision Enhancement Act
of 1991 could serve as one model for implementing into law at
the national level the principles espoused by the Basle
Committee to promote adequate international banking supervision.
To address our first two objectives, we reviewed the Basle
Committee's publications to obtain a thorough understanding of the
committee's goals and initiatives as they relate to coordinating and
ensuring effective worldwide banking supervision. We also
interviewed officials representing bank regulators, supervisors,
bankers associations, and various banking experts in Belgium,
Luxembourg, France, Germany, Italy, Japan, the Netherlands,
Switzerland, the United Kingdom, and the United States in order to
obtain an up-to-date and balanced view of the nature of the
committee's activities and its contribution to improving
international banking supervision. We also interviewed an official
from the Basle Committee Secretariat in Basle, Switzerland. To
support the information we obtained in these interviews and from the
committee directly, we reviewed documents from international
organizations including the OECD and the European Community (EC).
To address our third objective, we reviewed various materials
analyzing the Foreign Bank Supervision Enhancement Act of 1991
including correspondence, memoranda of understanding, books and other
publications, and the actual banking regulation and legislation. We
interviewed the U.S. and foreign banking regulators, international
law firms, and consultants to gain a broad view of the intent of the
act. We also reviewed legislative testimony from both the U.S.
Congress and the houses of Parliament of the United Kingdom. In our
overseas interviews, we obtained an international perspective on the
U.S. law. In addition, we interviewed officials from a U.S. bank
rating agency, U.S. attorneys who specialize in international
banking issues, and experts from several U.S. banking associations.
We did our work between April 1992 and October 1993 in accordance
with generally accepted government auditing standards.
We sent drafts of this report to the Federal Reserve Board, OCC, and
FDIC for comment. Their comments are presented and evaluated in
chapters 3 and 4 and are reprinted in appendixes II through IV. Some
of OCC's comments are also addressed at the end of appendix III.
(See p. 77.) Other technical changes and clarifications provided by
the agencies have been incorporated into the chapters.
THE BASLE COMMITTEE AND OTHER
GROUPS HAVE ENHANCED COORDINATION
OF INTERNATIONAL BANKING
SUPERVISION
============================================================ Chapter 2
For almost 20 years, the Basle Committee on Banking Supervision has
been the main forum for improving the supervision of internationally
active banks. The committee has contributed to improvements in the
safety and soundness of international banking. In 1988, the
committee's Capital Adequacy Accord devised a framework for measuring
the adequacy of bank capital (that is, the difference between total
assets and total liabilities) and created a set of standards for
capital levels of international banks worldwide. In June 1992, the
committee issued minimum standards for supervising international
banks. These standards bolstered the principle that no bank should
operate without being subject to consolidated supervision or
effective worldwide monitoring of its activities. In addition, the
committee is addressing such issues as supervising conglomerates and
off-balance-sheet activities, developing standards for measuring and
controlling market risk,\1 and measuring interest rate risk.
Although the Basle Committee is the main global forum for enhancing
the effectiveness of bank supervision, other international groups
contribute to the process. The committee has worked closely with the
European Community and other regional groups in formulating its
principles (see app. I).
--------------------
\1 Market risk is the potential for loss due to movement in market
prices, including interest rates, exchange rates, and equity values.
BASLE COMMITTEE EFFORTS
---------------------------------------------------------- Chapter 2:1
The committee's main objective is to help encourage greater
coordination among international bank supervisors. It has pursued
this objective by (1) facilitating the exchange of information among
supervisors on the various national supervisory practices, (2)
encouraging safe and sound national regulatory policies and
practices, (3) developing general principles for adequately
supervising international banks, and (4) developing standards for
bank capital and other areas.
BASLE COMMITTEE ACCOMPLISHMENTS
---------------------------------------------------------- Chapter 2:2
In almost 20 years since its formation, the Basle Committee on
Banking Supervision has addressed sensitive bank supervisory issues,
especially those that have arisen because of the expansion of foreign
bank operations. In the original concordat (1975) and the revised
concordat (1983), the committee apportioned responsibility for
supervising foreign banking offices between countries in which the
offices are located (host countries) and those in which the banks are
headquartered (parent countries). The revised concordat also
introduced the concept of consolidated supervision. In the 1988
Capital Adequacy Accord, the committee established the minimum
capital standard defining how much capital internationally active
banks should maintain. The committee's 1990 Supplement to the
Concordat encouraged structured collaboration between foreign banking
supervisors. The committee, in its 1992 Minimum Standards for the
Supervision of International Banking Groups and Their Cross-Border
Establishments paper, attempted to ensure that all international
banks would be subject to effective consolidated supervision.
1988 CAPITAL ADEQUACY ACCORD
-------------------------------------------------------- Chapter 2:2.1
Regulators from the major industrial nations had been addressing
capital adequacy issues for some time in the Basle Committee. In
1986, the United States and the United Kingdom stimulated attempts to
reach an international agreement on minimum capital requirements by
issuing a bilateral agreement for comment on a framework to evaluate
the adequacy of a bank's capital in relation to its risk.\2 Following
negotiations within the Basle Committee, this proposal was amended,
resulting in the 1988 capital accord for measuring credit risk,\3
which the committee viewed as the major risk banks face. Credit risk
involves the risk of loss from default on a loan or other obligation.
The expressed objective of the capital framework was
to strengthen the soundness and stability of the international
banking system by increasing individual banks' capital levels
and
to level the international playing field because countries'
different regulatory requirements were causing some competitive
inequality between banks.
An additional objective of the framework was to ensure that banks set
aside enough capital to support their off-balance-sheet activities.
These activities often were not included in domestic capital
requirements.
The Basle framework for measuring capital adequacy includes the
following three basic elements:\4
A common definition of capital that emphasizes the importance of
core capital (tier 1 capital), which consists of capital
elements generally counted in most nations, is one of the
elements. The definition also includes tier 2, or
supplementary, capital with capital instruments used in some,
but not all, member countries.
A risk-weighting framework that ties capital requirements to the
credit risk of assets and off-balance-sheet activities is
another element.
A standard that internationally active banks maintain capital to at
least an 8 percent level of their risk-adjusted assets by
year-end 1992 is a third element. At least half this capital
must be tier 1.
At present, the Basle Committee is monitoring the accord, considering
the incorporation of other types of risks, and addressing a number of
technical questions in interpreting certain provisions. (See
"continuing efforts" later in this chapter.)
--------------------
\2 "Convergence of Capital Adequacy in the United Kingdom and the
United States," January 1987.
\3 This framework is outlined in the International Convergence of
Capital Measurement and Capital Standards, Committee on Banking
Regulations and Supervisory Practices (Basle, Switzerland: July
1988).
\4 For a more detailed discussion of the framework, see International
Banking: Implementation of Risk-Based Capital Adequacy Standards
(GAO/NSIAD-91-80, Jan. 25, 1991).
THE BASLE CONCORDAT OF 1975
-------------------------------------------------------- Chapter 2:2.2
In 1975, the Basle Committee published the Report to the Governors on
the Supervision of Banks' Foreign Establishments, known as the Basle
Concordat of 1975. The concordat lays out guidelines for cooperation
between national authorities in supervising foreign banks. The
concordat delineates supervisory responsibility for three types of
foreign banking operations: (1) branches, which are integral parts
of a foreign parent bank; (2) subsidiaries, which are legally
independent institutions incorporated in the country of operation and
controlled by one foreign parent bank; and (3) joint ventures, which
are legally independent banks incorporated in the country of
operation and controlled by two or more parent institutions. In
addition, the concordat addresses banking supervision from three
aspects: liquidity,\5 solvency,\6 and foreign exchange operations
and positions.\7
The Basle Concordat of 1975 divides the responsibility for
supervising foreign banking offices between the host supervisor,
meaning the supervisor in which the foreign office is located, and
the parent supervisor based on the liquidity, solvency, and foreign
exchange positions of foreign bank operations. The committee decided
that while the primary responsibility for supervising the liquidity
of foreign bank operations rests with the host supervisor, the parent
supervisor must be aware of the foreign branches' demands on the
parent banks' resources. In supervising the liquidity of foreign
subsidiaries and joint ventures, the host supervisor should inform
the parent supervisor of its methods for evaluating liquidity.
In supervising solvency, the committee recommended that the host and
parent supervisors share responsibility based on the type of foreign
banking operation. For foreign subsidiaries and joint ventures, the
host supervisor has the main responsibility, but the parent
supervisor must consider the exposure of the offices for which it has
a "moral commitment." For foreign branches, the committee decided
that since the solvency of a branch is linked to its parent's
solvency, the responsibility for monitoring this element rests
essentially with the parent supervisor. The division of
responsibility for supervising the foreign exchange position of
foreign banking operations mirrors those responsibilities established
for branches and subsidiaries discussed previously.
Finally, the committee recommended the removal or reduction of any
barriers that impede close cooperation between national supervisors.
Specifically, the committee recommended the following action: (1)
direct transfers of information between national supervisors; (2)
direct inspections by the parent supervisor of its domestic banks'
foreign offices; and (3) indirect inspections of foreign banking
offices by parent supervisors through the agency of the host
supervisor.
--------------------
\5 Liquidity is the ability to convert assets into cash or cash
equivalents without significant loss.
\6 Solvency is the ability to meet current obligations as they come
due.
\7 Foreign exchange operations provide customers with foreign
exchange services. Banks may also trade on the foreign exchange
market, that is, buy and sell stocks and currencies in an effort to
earn profits.
THE BASLE CONCORDAT OF 1983
-------------------------------------------------------- Chapter 2:2.3
In 1983, the Basle Committee published the Principles for the
Supervision of Banks' Foreign Establishments. Known as the "revised
concordat," this document replaced the 1975 concordat, reformulated
some of its provisions, and introduced the principle of consolidated
supervision. The Basle Committee intended the principles in the
revised concordat to be taken as "best practices," which G-10 member
countries have begun implementing.
The revised concordat reemphasized the concept of cooperation between
the parent and host supervisors found in the 1975 concordat and also
provided more specific guidance on their respective areas of
responsibility. It gave primary responsibility for monitoring the
liquidity of foreign branches, subsidiaries, and joint ventures to
the host supervisor. It also gave the parent supervisor primary
responsibility for monitoring the solvency of foreign branches. In
addition, it required that the parent and host supervisor share
responsibility for monitoring the solvency of foreign subsidiaries,
as well as monitoring the foreign exchange operations and positions
of foreign banking offices.
The revised concordat recommended that the host and parent
supervisors regularly take certain actions.
Host and parent supervisors should keep each other informed when
serious problems arise in a parent bank that are likely to
affect the parent's foreign banking offices.
The parent supervisor should determine whether the host supervisor
can adequately supervise a foreign banking office, and the host
supervisor should inform the parent supervisor if it cannot do
so.
The parent supervisor should extend its supervision over the
foreign offices or discourage the parent bank from continuing
the operations of the foreign offices when the host supervisor's
supervision is inadequate. Similarly, the host supervisor
should discourage, forbid, or impose restrictions on the
operations of the foreign banking office if the parent
supervisor's supervision is inadequate.
The parent supervisor should ensure that holding companies and
their subsidiaries are adequately supervised.
Finally, the revised concordat introduced the principle of
consolidated supervision, whereby the parent banks and parent
supervisory authorities monitor the risk exposure, including the
concentration of risks, the asset quality, and the capital adequacy
of the banks and banking groups under their responsibility "on the
basis of the totality of their business wherever conducted." The
revised concordat does allude to the importance of a lead supervisor
where "gaps in supervision can arise out of structural features of
international banking groups." The concordat places responsibility on
the parent authority, stating that "where a bank is the parent
company of a group that contains intermediate holding companies, the
parent authority should make sure that such holding companies and
their subsidiaries are covered by adequate supervision."
SUPPLEMENT TO THE CONCORDAT
-------------------------------------------------------- Chapter 2:2.4
A supplement to the concordat stemmed from a joint report by the
Basle Committee and the Offshore Group of Banking Supervisors\8
issued in August 1987. The Basle Committee recognized the permanent
status of the report by reissuing its proposals in April 1990 as a
supplement to the 1983 concordat. The supplement was designed to
provide practical recommendations for implementing those aspects of
the revised concordat that required consultation and flows of
cross-border information among supervisory authorities. It provided
recommendations to parent and host supervisors with regard to the
authorization of banking offices, the information needs of the parent
and host supervisors, the removal of secrecy constraints, and the
need for external audits. The supplement also addressed the
committee's belief that, although many supervisors consult when
foreign banks first seek to establish operations in the host country,
they do not collaborate as closely or as frequently as the concordat
advocates.
In authorizing foreign banking offices, the supplement recommended
that the host seek a prior endorsement from the parent supervisors.
If the parent fails to respond or fails to provide an adequate
response, the host should consider denying the application or
imposing restrictions on the authorization. If the parent's
supervision is inadequate, the authorization should be contingent on
the host supervisor's adopting the parent's role. Furthermore, the
parent authority should take measures to prevent its bank from
establishing operations in unsuitable locations or making
inappropriate acquisitions.
In satisfying the informational needs of the host and parent
supervisors, the supplement recommended that both host and parent
supervisors satisfy themselves that the internal controls of a
foreign bank are adequate, including maintaining comprehensive and
regular reporting between the bank's foreign operations and its head
office. The supplement recommended that the host supervisor consult
with the parent supervisor about actual, or suspected, serious
problems in a foreign bank's operation, and about its plans to remedy
them, or withdraw the foreign bank's authorization. It also
recommended that the parent and host supervisors coordinate in other
supervisory matters.
In making recommendations about constraints on information exchange,
the supplement stated that national secrecy laws designed to protect
legitimate interests of bank customers can be an obstacle to
information exchange among supervisors and banks. It continued by
noting that this legislation does not prevent national authorities
from exchanging generalized prudential information, such as
information on management competence and internal control systems.
The supplement's recommendations were based on the premise that
secrecy constraints should be removed to allow supervisors to
exchange prudential information freely, subject to certain conditions
meant to protect the providers and receivers of the information.
In addressing the need for external audits, the committee recommended
that (1) the authorization of foreign banking offices be contingent
upon adequate provision for external audits, (2) supervisors appoint
internationally qualified auditors and be able to replace inadequate
auditors, and (3) external auditors be able both to verify the
foreign banking office's data and communicate with the supervisor.
--------------------
\8 For a full description of the Offshore Group of Banking
Supervisors, see appendix I (pp. 66-7).
1992 MINIMUM STANDARDS
-------------------------------------------------------- Chapter 2:2.5
In 1992, the Basle Committee on Banking Supervision issued the
Minimum Standards for the Supervision of International Banking Groups
and Their Cross-Border Establishments. The committee created the
Minimum Standards to reinforce the principles espoused in its 1975
concordat, 1983 revised concordat, and 1990 supplement to the
concordat. The committee issued the Minimum Standards in an era of
growing international banking activities and in the aftermath of
events surrounding troubled international banking institutions, such
as BCCI. Moreover, the committee designed the Minimum Standards to
provide greater assurance that no international bank could operate
without being subject to effective consolidated supervision.
The committee emphasized in the introduction to the Minimum Standards
that, although the principles of the concordat and its supplement
remain sound, "there needs to be a greater effort to ensure that
these principles can be applied in practice." According to officials
we interviewed, the committee's reformulation of the principles into
standards, and its call for practical application versus mere
endorsement of those standards, demonstrates that while the committee
recognizes that prior agreements address the right issues, the
minimum standards reflect the need to address those issues with
greater force.
The main features of the minimum standards are as follows:
A home-country authority that capably performs consolidated
supervision should supervise all international banking groups
and international banks.
The creation of a cross-border banking office should receive the
prior consent of the host-country's supervisory authority. It
should also receive the prior consent of the bank's supervisory
authority, and, if different, the banking group's home-country
supervisory authority.
Supervisory authorities should have the right to gather information
from the cross-border banking offices of the banks or banking
groups for which they are the home-country supervisor.
A host-country authority that determines that any one of the prior
minimum standards is not met can impose restrictions on the
bank, including prohibiting the bank from establishing any
offices within the host authority's jurisdiction.
Basle Committee representatives told us that the committee
deliberately expressed these standards in general terms because the
various countries that will be implementing them need flexibility
according to their individual legal and structural conditions. As a
result, the committee intends to monitor the implementation of the
minimum standards in its ongoing collaborative work on the
supervision of international banks.
A more in-depth discussion of the minimum standards can be found in
chapter 3.
CONTINUING EFFORTS
---------------------------------------------------------- Chapter 2:3
In addition to the major initiatives discussed thus far, at the time
of our review the Basle Committee on Banking Supervision was working
in several other areas including monitoring the capital accord,
market risk, conglomerate supervision, and the management of
off-balance-sheet activities. Foreign bank supervisors and
international banking experts with whom we spoke indicated that these
issues were among the most critical on the Basle Committee's agenda.
MONITORING THE 1988 CAPITAL
ADEQUACY ACCORD
-------------------------------------------------------- Chapter 2:3.1
The Basle Committee continues to monitor implementation of the accord
and has dealt with a number of technical issues concerning
interpretation of certain provisions. The committee amended the
capital accord in November 1991, to be effective no later than
year-end 1993, to define more clearly to what extent general
loan-loss reserves could qualify for inclusion in capital. The
committee's intention was to ensure that the reserves banks set aside
for both identified loan losses and demonstrable deterioration in the
value of particular assets should not be included in the capital
base, which is specifically meant to absorb unidentified losses.\9
--------------------
\9 For a full description of the amendment, see Report on
International Developments in Banking Supervision, Report 8, Basle
Committee on Banking Supervision (Basle, Switzerland: Sept. 1992).
MARKET RISK
-------------------------------------------------------- Chapter 2:3.2
The Basle Committee devoted considerable effort to the issue of
identifying market risk after the 1988 Capital Adequacy Accord was
completed. That accord focused mainly on credit risk. The committee
realized that banks were increasingly participating in trading and
off-balance-sheet activities, such as using derivative instruments,
that would expose them to greater market risk. The committee also
knew that supervisors needed tools to measure and monitor the extent
to which banks were exposed to such risk. In attempting to deal with
the issue of market risk, the Basle Committee has collaborated with
members of the International Organization of Securities Commissions
(IOSCO), many of whose members regulate the securities subsidiaries
of banks. The Basle Committee and IOSCO share the goal of ensuring
that the competitive equality among banks, including banking groups,
and nonbank securities houses is maintained. Maintaining this
competitive equality would avoid distortions of the market while
preserving the effectiveness of both systems of supervision.
For the first time, the Technical Committee of IOSCO and the Basle
Committee held a joint meeting in January 1992 to consider proposed
minimum capital rules for internationally active banks and securities
firms. The IOSCO membership had not agreed on common minimum
standards for securities firms. In April 1993, the Basle Committee
went ahead and published three consultative proposals on netting,\10
market risk, and interest rate risk, with comments invited by
year-end 1993.
--------------------
\10 In dealing with credit risk, the Basle Committee, which supports
netting where legally permitted, refers to "netting" as risk
weighting the net rather than the gross claims arising out of various
off-balance-sheet activities.
SUPERVISING CONGLOMERATES
-------------------------------------------------------- Chapter 2:3.3
As discussed in chapter 1 (see pp. 17-8), financial conglomerates
present several challenges to bank supervisors. In September 1992,
the secretariat of the Basle Committee drafted a working document
that presented principles for supervising financial conglomerates.
Briefly, those principles call for supervisors to have sufficient
formal authority to prohibit corporate structures from being
deliberately designed to obstruct effective supervision; require the
corporate group to have sufficient capital to support the risk of the
entire group and ensure against double counting of capital among
group members; require supervisors to perform groupwide supervision
by obtaining adequate information about the types of risks faced by
group members; ensure that shareholders' interests do not prevail
over those of depositors, investors, policyholders, and customers
generally; and ensure that management is capable of handling the
diverse risks within the group and that appropriate external audits
exist.
OFF-BALANCE-SHEET ACTIVITY
MANAGEMENT
-------------------------------------------------------- Chapter 2:3.4
Reacting to the rapid development of markets for new financial
instruments, the Basle Committee at the time of our review was
studying the supervisory treatment of off-balance-sheet instruments.
Not only have new financial instruments emerged, but once relatively
immature markets have also developed in size and sophistication. The
committee has stated that it intends to cover the following issues:
(1) the present treatment of financial instruments contained in the
Capital Adequacy Accord, (2) the treatment of financial instruments
not addressed in the accord, and (3) the concentration of
counterparty exposure in the financial derivatives market.
THE NEED FOR GREATER ADHERENCE TO
BASLE COMMITTEE STANDARDS IS
RECOGNIZED
============================================================ Chapter 3
The Basle Committee's collaborative, nonlegalistic approach has been
effective in addressing the right issues, providing valuable
guidance, and devising solutions to the challenges facing
international banking supervisors. Its informal, cooperative
approach worked well to create the 1988 Capital Adequacy Accord, for
instance. There was little support among the bank supervisors and
experts with whom we spoke for giving the Basle Committee the force
of law, or for creating a separate supranational regulatory body to
enforce supervisory principles. On the other hand, the committee's
lack of authority to enforce the adoption of its initiatives has
proven to be both advantageous and limiting. The collapse of BCCI
was due in part to the failure of any supervisor to perform
consolidated supervision, a principle first incorporated in the
committee's 1983 revised concordat. Both in response to the BCCI
case and previously to the need for increased bank capital levels
worldwide, the Basle Committee has been moving toward taking on a
more forceful role within its current framework.
Both the 1988 Capital Adequacy Accord and the 1992 Minimum Standards
call for the committee to monitor implementation; supervisors
consider both agreements to be more rigorous than the previous
concordats. Still, the committee faces some constraints to ensuring
effective implementation of its Minimum Standards. The standards are
necessarily fairly general: Countries must not only adopt the
standards but also carry them out capably; supervisors lack complete
information on the extent to which their colleagues worldwide apply
consolidated supervision and other committee standards; and Basle
Committee members believe the committee must continue to rely on
moral suasion rather than legal authority to encourage adoption of
its standards and monitor their implementation.
Basle Committee representatives are considering ways to better ensure
adherence to committee standards while preserving individual nations'
sovereignty over their banking systems. These ways include
establishing a clearinghouse for worldwide supervisory practices and
conducting peer reviews to assess countries' progress in adopting
committee standards.
THE BASLE COMMITTEE'S VOLUNTARY
APPROACH WORKED IN FORGING THE
CAPITAL ADEQUACY ACCORD
---------------------------------------------------------- Chapter 3:1
The informal, voluntary system worked in formulating the 1988 Capital
Adequacy Accord (discussed in chap. 2). One indication of this
reliance on national cooperation rather than formal treaties is that
the accord itself was not drafted as a binding legal agreement;
instead, it was "endorsed" rather than signed by the membership. The
document is essentially a statement of intent by committee
representatives to adopt capital adequacy standards that would be
based on common definitions of "capital" and "risk." It allows
countries flexibility in the way they implement the rules, taking
into account their different regulatory systems.
The accord has been incorporated into the supervisory frameworks of
all countries that are members of the Basle Committee. Virtually all
countries that are not members of the Basle Committee but have large
international banks have introduced, or are working on introducing,
the standards espoused in the Capital Adequacy Accord, including all
of the EC countries. According to a Basle Committee report, since
the accord, the capital ratios of larger international banks have
increased considerably. At year-end 1991, in most cases they
exceeded the accord's minimum capital standard of 8 percent. The
committee reported that the increase in capital adequacy ratios is
partly due to a decreased rate of growth in the acquisition of risky
assets. However, the committee noted that the rise is mostly due to
an increased growth in capital reserves.
Despite the fact that a binding structure was absent, several factors
motivated national supervisors to reach an agreement on capital
levels. For several reasons, regulators were willing to follow the
collective approach rather than rely on bilateral or individual
efforts. Above all, the Basle Committee was not forcing its own
agenda on national regulators, but reflecting their common interests.
Regulators shared a common concern in the early 1980s that, due to
the international debt crisis, bank safety and soundness were being
threatened by depleting worldwide levels of bank capital. At the
same time, regulators wanted to ensure a level playing field,
recognizing that for one or two countries to adopt capital adequacy
standards might only mean banks would flock to the jurisdictions with
lesser capital standards and the overall banking system would not be
made more safe and sound. These two factors, the concern for safety
and soundness and the recognition that individual efforts would be
counterproductive, drove supervisors to commit their banking
authorities to surrender some of their separate standards in the
interests of reaching an agreement.
The implementation of the Capital Adequacy Accord is ongoing. The
Basle Committee continues to monitor its progress and refine and
expand the capital adequacy standards to ensure that they are
implemented and effective. The informal approach comes into play in
this monitoring effort as well, since it will likely be carried out
by committee representatives and their staff, rather than by either
the Secretariat in Basle or a separate internationally sanctioned
organization. We believe the expertise and practical experience of
the committee members make them uniquely qualified to judge the
extent to which their peers are implementing the accord in a
consistent manner. Committee representatives also retain the
flexibility to recognize and alleviate any unintended side effects.
SUPRANATIONAL REGULATORY BODY
LACKS SUPPORT
---------------------------------------------------------- Chapter 3:2
Supervisors and experts with whom we spoke generally believe a
supranational regulatory body with the force of law would threaten
national sovereignty, be mired in bureaucracy, and, in order to avoid
the possibility of sanctions, would create agreements so general in
nature as to be ineffective. Bank supervisors and experts believe
that supervisors are more likely to come to a consensus and create
substantive agreements if they can propose solutions without the need
to gain permission from their respective governments. Thus,
supervisors have been able to formulate workable solutions, forge
consensus, and create effective agreements. In addition, since laws
by their very nature would be slower to amend than principles, giving
the committee statutory authority could reduce its flexibility in
dealing with an industry that is constantly and rapidly changing as
new financial products emerge.
Bank supervisors believe the Basle Committee's informal structure is
one key to its success in coordinating international banking
supervision. Lacking statutory authority to change national laws and
regulations, or to enforce its principles through sanctions or other
means, the committee has gained acceptance through cooperation, moral
suasion applied among its membership, and the formulation of
agreements that reflect market forces and the best interests of the
parties involved. In their view, the committee members--central
bankers and bank supervisors--have the expertise necessary for
dealing with a complex area and the responsibility for improving
banking supervision. We believe there is little likelihood of a
binding international agreement that would mandate adherence to a
meaningful set of international standards for supervision. In fact,
international bodies are generally reluctant to impose sanctions.
One academic expert we spoke with, Dr. Richard Dale, favored the
formation of a multilateral organization with wider membership beyond
the G-10 countries and enforcement powers comparable to the
International Monetary Fund. He was concerned that the Basle
Committee lacked the broad reach and legal status necessary to
provide an international overview beyond the G-10 countries and to
cover all aspects of international finance, both banking and
nonbanking, necessary in today's essentially borderless international
market. Ideally, such a body would have the authority to quickly
address specific problems rather than relying on general agreements
and the discretion of national authorities to enforce them. However,
he admitted the creation of such a body was unrealistic at this time,
given the legitimate concerns of supervisors and experts we discussed
earlier, and would perhaps function successfully only in an "ideal
world."\1
--------------------
\1 In testimony before the United Kingdom's Treasury and Civil
Service Committee of the House of Commons, Dale stated, "The Basle
[Committee] arrangements seek to be global but are substantially
voluntary and in an ideal world no doubt we would have a legally
binding international agreement which would also be global in its
scope. I think realistically we are not at that stage yet and I
cannot envisage getting such an agreement. Short of that, I would
have thought the Basle arrangements are a fair second best, not
without their weaknesses of course."
EXPANDING MEMBERSHIP IS
QUESTIONED
-------------------------------------------------------- Chapter 3:2.1
Another issue regarding the Basle Committee's standing as an
effective forum is whether the committee should expand its
membership. Basle Committee representatives and international
banking experts with whom we spoke generally believed that expanding
the membership would make the committee less effective. With a
larger membership, the danger of slowing down consensus and impeding
agreements would be increased. Committee representatives said they
consult nonmembers on all their initiatives and give them a chance to
comment substantively. Also, they said that Basle Committee-related
groups, such as the Offshore Group of Banking Supervisors (see pp.
66-7), are regularly in contact with the committee, as committee
members are either members of those groups themselves or attend their
meetings on a regular basis as observers. The Basle Committee
facilitates contact between supervisors all over the world and
circulates technical documents to assist the process of supervision,
as well as more policy-oriented documents.
Nevertheless, a few of the foreign bank supervisors and international
banking experts with whom we spoke believed that, despite genuine
attempts by the committee to include nonmember countries in the
review and formulation of committee initiatives, expansion of the
committee's formal membership still had some merit. They believed
that current nonmembers may be more likely to comply with Basle
principles if they formally participated in their creation and that
the unique concerns of the non-G-10 countries might be better aired
through full membership. They were not convinced that the special
concerns of nonmembers were consistently being addressed, and they
believed that nonmember countries may in some cases view the
committee as an exclusive club that does not address their particular
needs. One foreign bank supervisor with whom we spoke believed the
committee could do more to include countries from Asia and the
Caribbean.
In summary, bank supervisors generally believe the Basle Committee is
the best forum to coordinate international banking supervision.
However, in view of the events surrounding BCCI, the bank
supervisors, as evidenced by their issuance of the Minimum Standards,
and several experts with whom we spoke believe that some further
steps could be taken to ensure that proper international bank
supervisory standards are adhered to by committee member nations and
nonmember nations alike.
BCCI SITUATION POINTS UP
PROBLEMS IN APPLYING BASLE
PRINCIPLES
---------------------------------------------------------- Chapter 3:3
Despite the formulation and adoption of the 1988 Capital Adequacy
Accord and countries' commitments to the Basle Committee concordats
for supervisory principles, problems have continued to occur. In
some cases, national implementation of the committee's supervisory
principles has not been effective, we believe. In other cases, no
supervisory authority was prepared to act as lead supervisor over all
of BCCI's operations.
BCCI EVADED BASLE PRINCIPLES
-------------------------------------------------------- Chapter 3:3.1
The BCCI case highlights the reality that countries are still not
fully committed and consistently able to apply Basle Committee
principles when necessary. The Basle Committee's 1983 revised
concordat, as described in chapter 2 (pp. 29-30), assigns various
supervisory functions to either or both the parent and host
supervisors and calls for both to cooperate and exchange information.
But significantly, the revised concordat assigns overall
responsibility to the parent supervisor for overseeing a bank's
entire worldwide operation: "Parent authorities are
responsible...where a general supervisory responsibility exists in
respect of their worldwide consolidated activities." Complementing
this responsibility over a bank's worldwide operations, the revised
concordat recommends that the parent authority provide consolidated
supervision. Consolidated supervision means monitoring the risk
exposure (including the concentrations of risk, the quality of
assets, and the capital adequacy) of the banking groups for which the
parent authority bears responsibility, on the basis of the totality
of the business, wherever conducted. Finally, the revised concordat
states that if a host supervisor believes the home supervision of
foreign banks operating within its territories is inadequate, it
should prohibit or discourage the banks' continued operation or
impose restrictions on their activities within its territory.
BCCI clearly lacked a parent authority\2 capable of performing
consolidated supervision over the banking group. BCCI had a complex
and unique organizational structure;\3 during most of the 1980s,
international bank supervisors struggled to deal with this
completely. This complicated structure hampered effective
supervision. Since BCCI's main holding company was incorporated in
Luxembourg, under the Basle principles the Luxembourg authority, the
Institut Mon�taire de Luxembourg (IML), was the lead regulator
responsible for conducting consolidated supervision. IML, however,
testified before the Treasury and Civil Service Committee\4 that it
found it difficult to exercise adequate consolidated supervision over
"a group 98 percent of whose activities fell outside its
jurisdiction." The U.S. accounting firm of Price Waterhouse, which
did an audit of BCCI, testified, "The resources available to the
Regulators in BCCI's main territories of incorporation--Luxembourg
and Cayman--were not commensurate with the fast expanding worldwide
operations of the group."
In keeping with the committee's informal approach, the revised
concordat states that where situations occur whose circumstances do
not fit into the revised concordat's principles, parent and host
authorities "should explore together ways of ensuring that adequate
supervision of banks' foreign establishments is effected." IML and
other supervisors attempted to work together to fashion a solution.
In 1985, IML notified BCCI's other regulators that it could not
practically fulfill its role as lead regulator. Therefore, it
suggested that BCCI incorporate separately in the United Kingdom so
that the Bank of England could take on the role of lead regulator.
As a partial solution, in 1987 IML and other regulators established
an informal body known as the "College of Regulators,"\5 which served
as a mechanism for member nations to share information on BCCI
activities. The college first met in June 1988. Although the
college was first formed because none of the banking supervisors were
prepared to take responsibility as lead regulator, it was not a
sufficient solution and was never intended to replace consolidated
supervision. The Treasury and Civil Service Committee concluded that
"a College of Regulators may be helpful for the dissemination of
information but cannot replace the lead regulator's role." The
committee further proposed that the Basle revised concordat be
changed accordingly.
Although the revised concordat does not specifically refer to a "lead
regulator," it does clearly assign responsibility to a "parent
authority," especially in cases where "gaps in supervision can arise
out of structural features of international banking groups," as was
the case with BCCI. The concordat states, "Where a bank is the
parent company of a group that contains intermediate holding
companies, the parent authority should make sure that such holding
companies and their subsidiaries are covered by adequate
supervision." The concordat states further that "full implementation
of the consolidation principle may well lead to some extension of
parental responsibility."
We believe the issue is not the need to add to or change the
concordats. They provide adequate guidance. The issue is the
assurance that commitment to the principles in the 1983 revised
concordat is reflected in actual practice. IML realized that it
simply lacked the capability or resources to carry out consolidated
supervision over the entire BCCI group. As a nonregulatory body, the
Basle Committee can generate commitment to its principles, but
national discretion still controls their actual implementation.
--------------------
\2 At least as early as 1976, New York State banking regulators
turned down BCCI's attempts to establish a U.S. banking presence
because it did not have a suitable primary regulator. The Federal
Reserve Board charged, in July 1991, that senior officials of BCCI
set up secret arrangements illegally to acquire Independence Bank.
Specifically, the Board charged that BCCI was in violation of U.S.
law by becoming a bank holding company through its acquisition of 25
percent or more of the shares of Credit and Commerce American
Holdings--the parent of First American Bankshares--and Independence
Bank, without Federal Reserve Board approval.
\3 BCCI was headed by a holding company incorporated in Luxembourg.
Its two main subsidiaries were also incorporated in Luxembourg and
Grand Cayman Island. However, neither the holding company nor the
subsidiary conducted business in Luxembourg. A worldwide network of
branches operated in over 70 countries, including the United Kingdom,
where BCCI conducted much of its business.
\4 The Treasury and Civil Service Committee is a committee of the
British House of Commons. It conducted a series of hearings during
its 1991-92 session following the closure of BCCI. As a result, it
issued a report entitled Banking Supervision and BCCI: International
and National Regulation.
\5 The College of Regulators consisted of the original members, the
United Kingdom, Switzerland, Spain, and Luxembourg; Hong Kong and the
Cayman Islands joined in 1989; France and the United Arab Emirates
joined subsequently.
THE BASLE COMMITTEE HAS BEEN
MORE FORCEFUL WITHIN ITS
CURRENT STRUCTURE
---------------------------------------------------------- Chapter 3:4
While the Basle Committee values and wishes to preserve its informal
structure, in response to the increasing importance of improving
international banking supervision worldwide it has been evolving in
recent years from a vehicle meant purely to exchange information and
agree upon best practices, into a decision-making body issuing
regulatory standards. The crucial question is how far the committee
can go in this more forceful direction without jeopardizing its
nonlegal status. Committee member nations agree that the principles
espoused in the concordats are valid. They are now moving more
closely into the realm of ensuring that countries actually honor
those principles. The difficulty is doing so within the confines of
the committee's informal structure.
Compared to its origins, the Basle Committee has taken on a higher
profile in recent years. Its original 1975 concordat was not
released to the public until more than 5 years after its adoption by
central bankers. This practice is in contrast to the almost
immediate and wide dissemination of the 1992 Minimum Standards,
partially in response to the closure of BCCI a few months earlier.
In both the 1988 Capital Adequacy Accord and the 1992 Minimum
Standards, the Basle Committee goes beyond providing information and
guidance to setting specific standards that all committee member
countries are expected to adopt. In both agreements, the committee
will monitor that adoption.\6 These relatively new roles are
significant and must be carried out carefully in order to preserve
the committee's informal, nonlegal structure.\7
As discussed earlier, the Capital Adequacy Accord was not binding in
the legal sense, but countries have been compelled to honor its
provisions due to collective interests and incentives. It remains to
be seen whether countries will adopt the committee's latest major
initiative, the Minimum Standards. However, the paper does appear to
reflect the committee's movement toward a more proactive stance,
based on experience with the Capital Adequacy Accord.
--------------------
\6 Writing about the 1988 Capital Adequacy Accord, the former
Secretary to the Basle Committee said, "The agreement secures
commitments considerably more precise than any of the Committee's
previous papers."
\7 The former Secretary continued, "Although not legally enforceable
as a treaty, and although the Committee is not a formally constituted
international organization, nonetheless the agreement is considered
to be binding on the members and the agreement itself states that the
Committee will continually monitor its application."
THE MINIMUM STANDARDS ARE
MORE FORCEFUL IN TONE
-------------------------------------------------------- Chapter 3:4.1
The Basle Committee attributes the necessity for issuing its Minimum
Standards to the growth of international banking activities and
"experience gained in the supervision of seriously troubled banking
institutions, notably Bank of Credit and Commerce International."
These standards do not deviate substantively from the principles
espoused in the concordats, which have, in fact, been "reformulated
as minimum standards," according to the Basle Committee. What is
different is the more forceful tone of the new paper, whose standards
the "G-10 supervisory authorities expect each other to observe."
This more forceful tone is evident in several areas. The committee
pledges to oversee the implementation of the standards, stating that
it will take "the necessary steps to ensure that their supervisory
authorities meet the standards as soon as possible," and "monitor
members' experience in implementing them with a view to determining
what further refinements are needed." In addition, the committee
brings up the need for a greater effort to ensure that the principles
in the concordats "can be applied in practice," and specifies that
the bank and banking group must be "subject to the authority of a
supervisor with the practical capability of performing consolidated
supervision."
The 1983 revised concordat does not urge immediate adoption of its
principles but merely "strongly commends the principles set out in
this report as being of general validity...and hopes that they will
be progressively accepted and implemented by supervisors worldwide."
The revised concordat makes no mention of the committee monitoring
implementation of its principles and does not specify that
supervisors have the capability to carry them out effectively.
The change from principles to minimum standards is another clue to
the committee's more forceful role. Bank supervisors and committee
representatives we spoke with said that the terms "principles" and
"minimum standards" differ in significant ways. "Minimum" signifies
a cut-off point anything below which is not acceptable. "Standards"
implies something specific and measurable such as in the 1988 capital
adequacy accord. For instance, one cannot have "minimum principles."
Supervisors further believe that the Minimum Standards paper
represents a commitment on the part of regulators to adopt the
standards into their respective national laws, as has proven the case
with the Capital Adequacy Accord. However, the supervisors
recognized that achieving more widespread adoption of its principles
through the Minimum Standards would be a challenge to the committee
due to the nature of banking supervision, the variation in
supervisory practices among nations, and the committee's lack of
legal authority to enforce them.
THE BASLE COMMITTEE FACES
CONSTRAINTS TO ENSURING BETTER
ADHERENCE TO ITS PRINCIPLES
---------------------------------------------------------- Chapter 3:5
While bank supervisors support the Basle Committee's Minimum
Standards, they believe that the committee faces constraints to
ensuring that supervisors' commitment to adopting the standards is
translated into enhanced bank supervision. The standards are
necessarily nonspecific; the standards must be not only adopted but
also applied capably; supervisory practices vary among countries, and
supervisors lack information on the extent to which their colleagues
are following Basle Committee principles; and, due to its lack of
formal authority, the committee must be cautious in monitoring and
encouraging implementation of the standards.
The Basle Committee intentionally did not provide detailed criteria
in its Minimum Standards in order to give supervisors the flexibility
to deal with their unique banking and regulatory situations and to
allow for the considerable judgment involved in supervision. The
supervisors with whom we spoke believed that supervisory standards
must be fairly nonspecific and nonquantifiable, defining and ensuring
capable supervision while preserving bank supervisors' ability to
apply judgment when needed. They did not favor detailed, numerical
requirements or check lists. They believed the degree of judgment
and discretion involved was due to the variation in banking and
regulatory systems and to the sensitive situations they encountered.
For example, a supervisor must consider a range of factors to judge
whether a bank is "fit and proper," and the conclusion will vary
depending upon the circumstances.
While supervisors favored a flexible approach, many of the
supervisors and experts with whom we spoke believed that adopting
rules and regulations alone would not ensure adequate supervision.
For example, they believed that there should be some assurance that
supervisors not only collect the proper information, but also verify
its accuracy and use it effectively to limit excessive risk. The
Minimum Standards state that the host supervisor should assure itself
that the parent supervisor has the "practical capability of
performing consolidated supervision." Namely, the parent supervisor
must "receive consolidated financial and prudential information on
the bank's or banking group's global operations" and "have the
reliability of this information confirmed to its own satisfaction
through on-site examination or other means...." However, monitoring
and assuring this capable supervision is difficult due to both the
amount of judgment mentioned earlier and to the in-depth knowledge of
countries' supervisory practices necessary to address such an issue.
Through the Basle Committee's Minimum Standards and, in the case of
the United States, the U.S. Foreign Bank Supervision Enhancement Act
(see chap. 4), countries are increasingly expected not only to meet
common supervisory standards, but also to judge the extent to which
their counterparts in other countries do so. Yet, supervisors often
lack current information about each other's supervisory practices,
the extent to which they meet the Basle Minimum Standards, and in
particular, whether they are practicing consolidated supervision.
We were told that supervisors generally gained a sense of how well
their counterparts in other countries supervised through informal,
bilateral contacts or through participation in Basle Committee
meetings. Nevertheless, U.S. supervisory authorities believed that
not all supervisors communicate equally as effectively or as
consistently among their peers, making total reliance on an informal
system less than ideal. We believe that this situation may be
particularly true for non-Basle Committee member countries that may
enjoy fewer informal ties with G-10 and other supervisors. Without
some central source of such information, as banking supervisors
comply with the Minimum Standards, they will be collecting the same
information from multiple countries. This practice is inefficient
and neither helps the supervisor to apply a common set of criteria in
judging each other's supervisory practices nor facilitates
supervisory efforts to monitor each other's progress in meeting Basle
Committee standards.
The committee's lack of authority to enforce its standards makes
monitoring their implementation difficult and diplomatically
sensitive. As discussed earlier, foreign bank supervisors and
experts with whom we spoke generally gave the Basle Committee high
marks as an effective mechanism to improve the quality of banking
supervision worldwide. They did not support creating a supranational
regulatory body or giving the committee the legal means to enforce
its standards. However, supervisors generally believed that more
could be done to prevent problem banks from establishing operations
worldwide. A Basle Committee official did not believe the committee
could issue a "black list" of banks with unacceptable management or
supervision, as it would be too difficult and controversial.
Officials with whom we spoke had identified, through their informal
channels, at least one "other BCCI" now doing international banking
business, whose cross-border expansion banking supervisors agreed to
limit. The officials did not name the bank or describe the scope of
its international activities. They mentioned the bank to emphasize
that situations requiring coordinated international efforts continue
to arise. In view of the problems surrounding BCCI, supervisors and
experts saw a need for better monitoring the implementation of the
Minimum Standards without the imposition of a legal framework or
interference with their national sovereignty over their banking
systems.
SOME EFFORTS BEING CONSIDERED
TO BETTER ENSURE QUALITY
SUPERVISION
---------------------------------------------------------- Chapter 3:6
Peer reviews are commonly used in similar settings to ensure that
practice meets commitment, and as a basis to judge competence.
Supervisors with whom we spoke, as well as the Bingham Report,\8
cited the Financial Action Task Force on money laundering\9 as one
example of an effective use of peer review to monitor the
implementation of international standards. Like the Basle Committee,
the task force lacks the formal authority to enforce its
recommendations. The task force is monitoring the performance of its
members in two ways. They include an annual self-assessment process
using questionnaires, and a mutual evaluation involving on-site
visits by a team of experts. The mutual evaluations generate reports
for discussion among members. The task force issues an annual report
summarizing these reports and its other activities.\10 One official
with whom we spoke believed that the Financial Action Task Force
could eventually come under the auspices of the Basle Committee.
Some supervisors and experts suggested creation of a centralized
database or clearinghouse on supervisory systems so that supervisors
could easily check the supervision of other nations before making
decisions on authorizing foreign banks. One barrier to creating such
a database would be secrecy laws in some countries that prevent
supervisors from sharing certain types of information. The Basle
Committee is renewing a survey it initiated several years ago to
collect information on countries' supervisory systems, including the
standards followed.
--------------------
\8 Lord Justice Bingham of the United Kingdom conducted an inquiry
into BCCI and issued a report in October 1992.
\9 The Financial Action Task Force on money laundering was
established as part of the Paris Economic Summit of 1989 to examine
measures to combat money laundering. In April 1990, it issued a
report with 40 recommendations. The task force has 28 member
jurisdictions and regional organizations, including all OECD
countries and major financial centers. OECD has established a
secretariat to coordinate the efforts.
\10 For a more detailed discussion of the Financial Action Task Force
on money laundering, see Illicit Narcotics: Recent Efforts to
Control Chemical Diversion and Money Laundering (GAO/NSIAD-94-34,
Dec. 8, 1993).
CONCLUSIONS
---------------------------------------------------------- Chapter 3:7
Despite the Basle Committee's lack of formal authority to enforce its
initiatives, bank supervisors and experts believe it remains the best
forum to coordinate and promote safe and sound international banking
supervision. Through an informal approach, the committee has created
valuable initiatives and successfully forged agreements such as the
1988 Capital Adequacy Accord. Still, as witnessed by the BCCI case,
commitment to Basle Committee principles does not always mean their
application in practice. In addition, simply adopting international
rules and regulations does not ensure adequate supervision. For
instance, while collecting the proper information is important,
whether that information has been verified and how it is applied in
practice are equally crucial.
There is little support in the international banking community for
the creation of a supranational regulatory body with enforcement
powers to ensure adoption of the Basle Committee principles. Due to
the degree of judgment involved in international banking supervision
and the variation in supervisory regimes and banking systems
worldwide, supervisors opposed detailed international guidance, such
as numerical requirements or check lists specifying how supervisory
principles should be implemented.
The Basle Committee has been taking on a more forceful role in
ensuring that countries apply its principles in practice as soon as
possible. But the committee's informal status and the generally
incomplete information on international supervisory practices and the
extent to which banks worldwide are subject to consolidated
supervision over their global operations make the committee's task of
monitoring and ensuring capable banking supervision difficult and
diplomatically sensitive.
Peer reviews have been used in similar settings to deal with the gap
between commitment to the principles of adequate supervision and
their application in practice. They allow countries to more
rigorously assess each other's progress toward meeting the Basle
Minimum Standards through informal self-monitoring. Peer reviews
also help countries learn more about each others' practices and
procedures in supervising banks in an informal setting, as opposed to
being subjected to the oversight of a supranational regulatory body.
Members of the supervisory community have expressed interest in
pursuing the peer review route, possibly through informal Basle
Committee sponsorship.
Current information about countries' supervisory practices, in
particular the extent to which they practice consolidated
supervision, is not now readily available. Yet, this information is
essential as national regulators begin to enact laws and implement
regulations consistent with the Basle Minimum Standards, which are
based upon host supervisors judging the parent supervision of foreign
banks. A central source of information, such as a clearinghouse on
worldwide supervisory practices, has several advantages. A
clearinghouse helps avoid costly and inefficient duplication of
effort as multiple supervisors attempt to collect similar information
from the same countries. It also assists supervisors who are working
toward applying common criteria in making those judgments, and it
might serve to gauge worldwide progress toward improving the quality
of banking supervision.
RECOMMENDATION
---------------------------------------------------------- Chapter 3:8
In order to strengthen supervision of international banks worldwide,
it is necessary to ensure stricter application of the principles
espoused by the Basle Committee on Banking Supervision. We recommend
that the Chairman of the Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, and the Chairman of the
FDIC, in consultation with their colleagues on the Basle Committee,
seek an expanded role for the committee without the imposition of a
new legal framework or interference with national sovereignty. For
instance, U.S. supervisors could work with other Basle Committee
member supervisors to encourage and monitor progress toward adoption
of the committee's Minimum Standards by expanding its role as a
clearinghouse for information on supervisory practices. In addition,
the committee could facilitate a peer review process for bank
supervisors desiring such reviews, providing guidance for the conduct
of these reviews, and writing guidelines for ensuring the
confidentiality of supervisory information. In the peer reviews, the
supervisors would be assessed by evaluating their compliance with the
Basle Committee's Minimum Standards. Peer review reports could form
the basis for bank supervisors to strengthen their procedures. As
participants gain experience and refine the process over time, peer
review might be instituted as a standard component of supervisors'
efforts to strengthen the framework for international bank
supervision.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 3:9
The Federal Reserve Board and FDIC generally supported the overall
conclusions of the report and the recommendation that the Basle
Committee seek an expanded role to ensure application of its
principles. OCC did not comment on the recommendation but provided
written comments on issues discussed in chapter 4.
THE BASLE COMMITTEE NOW
SERVES AS A CLEARINGHOUSE
-------------------------------------------------------- Chapter 3:9.1
In commenting on our recommendation that U.S. bank supervisors seek
to expand the role of the Basle Committee, such as promoting its role
as a clearinghouse, the Federal Reserve Board and FDIC pointed out
that the Basle Committee now functions as a clearinghouse of
information on supervisory practices and regulations. The agencies
agreed, however, that the committee's role as a clearinghouse should
be expanded and enhanced. OCC did not comment on the clearinghouse
concept. We have rephrased our recommendation to clarify that the
committee should expand its role as a clearinghouse.
PEER REVIEWS GENERATE SOME
CONCERNS
-------------------------------------------------------- Chapter 3:9.2
In our recommendation, we noted that another way that U.S. bank
supervisors could foster greater reliance on the Basle Committee
would be to facilitate peer reviews to encourage and monitor progress
toward adoption of the committee's Minimum Standards. The Federal
Reserve Board and FDIC expressed concerns with this concept. OCC did
not comment on peer review.
While the Federal Reserve Board and FDIC believed that some support
for peer reviews exists in the supervisory community, they shared two
concerns. First, they expressed concern about the problem of
maintaining confidentiality of supervisory information. Second, they
cautioned that a formal peer review process could jeopardize the
cooperative relationships among members of the Basle Committee, whose
collaborative approach has thus far successfully dealt with and
resolved important supervisory issues.
We have rephrased our recommendation to clarify and further emphasize
that we are suggesting voluntary, informal peer reviews. When
countries wish to participate in peer reviews, we foresee the Basle
Committee facilitating their efforts by providing peer review
criteria and guidance, including how to ensure confidentiality of
supervisory information.
The Federal Reserve Board was also concerned that peer reviews might
generate a "moral hazard" (a term generally referring to the
incentive created by insurance, or other protection, that influences
those protected to take on greater risk than they would without the
protection). The hypothetical example cited by the Federal Reserve
Board was of a supervisor receiving a positive rating by a peer
review and subsequently having a bank under its jurisdiction
encountering difficulties: What, if any, would be the responsibility
of the peer reviewers?
We believe that there is potential for a moral hazard in many
scenarios in the international banking arena, including aspects of
deposit insurance protection, and the perception that certain banks
are "too big to fail." While moral hazard associated with peer review
is a theoretical possibility, we believe that the best way to control
moral hazard is to ensure safe and sound international banking. Peer
reviews would contribute to this goal by promoting improved
supervision, adequate capital levels, and effective regulation.
Finally, the Federal Reserve Board noted that countries now submit
detailed descriptions of their supervisory systems to the Basle
Committee and, in the Board's view, a review of countries' policies
and procedures for bank supervision may be accomplished without peer
reviews.
We continue to believe that peer reviews would offer unique benefits.
Peer reviews would allow bank supervisors to informally review each
other's supervisory systems and gain first-hand knowledge of the
extent to which they have the practical capability of implementing
the Basle Committee's Minimum Standards, for instance, consolidated
supervision. We believe that such self-assessments would enhance
supervisory coordination and further ensure against problem banks
establishing operations worldwide.
A STRONGER CASE NEEDED FOR
BASLE COMMITTEE AS MAIN
FORUM
-------------------------------------------------------- Chapter 3:9.3
OCC agreed with our conclusion that more can be done to enhance
global bank supervision. However, it believed that we should present
a stronger case for our conclusion that the Basle Committee is the
main forum for coordination of international banking supervision.
We concur with OCC's support for going beyond the Basle Committee to
coordinate international banking supervision where appropriate.
However, we see considerable value in ensuring that international
supervisory standards are improved in all nations and believe that,
even within its limited scope, the Basle Committee remains the
principal forum today for achieving that end. We view the Basle
Committee as the main vehicle because of its record of contributing
to improved international banking supervision. In particular, the
committee's 1988 Capital Adequacy Accord has formed the basis for
regulation in most major nations. While other approaches have also
contributed to improved supervision, no other has had as far-reaching
an impact. For instance, although the International Organization of
Securities Commissions has been working with the Basle Committee, it
has not yet forged a capital agreement for securities firms or
securities related activities. (See app. III, p. 77, for our
comments supplementing those in the report text.)
FBSEA IS ONE MODEL FOR IMPROVING
INTERNATIONAL BANKING SUPERVISION
============================================================ Chapter 4
In the wake of the BCCI and BNL scandals, the Basle Committee
responded to the supervisory gaps highlighted in these cases by
issuing its 1992 Minimum Standards, reemphasizing the need for
supervisors to follow the principles originally espoused in the
concordats. Similarly, the U.S. Congress enacted the Foreign Bank
Supervision Enhancement Act of 1991 on December 19, 1991, to
strengthen the federal supervision and regulation of foreign banks
operating in the United States. While significantly more stringent
and directed specifically at improving U.S. domestic banking
regulation of foreign banks, FBSEA's provisions enact into law
standards that are in some ways consistent with the Basle Minimum
Standards. As the U.S.' response to the real and potential problems
of supervising its foreign banks, FBSEA is one model of how sovereign
nations can implement into law the principles espoused by the Basle
Committee, we believe.
CONGRESS WANTED TO IMPROVE
FOREIGN BANK SUPERVISION IN THE
UNITED STATES
---------------------------------------------------------- Chapter 4:1
In the spring of 1991, following the discovery of unauthorized
activities within BCCI and BNL, the U.S. Congress was concerned
about the lack of proper federal oversight of foreign banks operating
in the United States. The Congress recognized the dramatic increase
in the number of foreign banks operating in the United States since
the enactment of the International Banking Act of 1978 (P.L.
95-369). In 1978, 94 foreign banks had offices in the United States,
versus 299 banks as of December 1992. In addition, today those
foreign branches and agencies that hold the vast majority of the
total assets are also state licensed. To a large extent, these
branches and agencies are state supervised. While the Congress was
not faulting state supervision, it believed that the supervision of
major foreign banks with operations in more than one state needed to
be better coordinated. In the case of BNL, the Federal Reserve was
not the primary regulator, and the states had no authority to examine
other states' operations. In addition, the Congress was concerned
that the existing standards for foreign bank entry into the U.S.
market needed to be more stringent, particularly after BCCI had
allegedly gained secret control of several U.S. banking
institutions.
At the request of the Chairman of the Senate Banking Committee, the
Federal Reserve Board submitted a proposal in May 1991 to strengthen
the supervision and regulation of foreign banks in the United States.
The Board's recommendations basically (1) established uniform federal
standards for entry of foreign banks into the United States; and (2)
clarified the Board's authority to conduct coordinated, simultaneous
examinations of foreign bank branches and agencies established in the
United States.
THE PROVISIONS OF THE FOREIGN
BANK SUPERVISION ENHANCEMENT
ACT OF 1991
---------------------------------------------------------- Chapter 4:2
The Federal Reserve Board of Governors submitted to the Congress
proposed legislation in May of 1991 designed to strengthen the
supervision and regulation of foreign banks operating in the United
States. The legislation was later introduced as FBSEA and enacted on
December 19, 1991, as title II, subtitle A, of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105
stat. 2236, 2286-2305).\1
FBSEA gives the Federal Reserve Board enhanced supervisory and
regulatory authority over foreign banks conducting banking in the
United States through branches, agencies, commercial lending
companies, and representative offices. The act was largely a
response to problems discovered in the U.S. operations of BCCI and
BNL and the perceived need for more federal oversight.
In the BCCI case, the Board was concerned about the bank's lack of
consolidated supervision over its worldwide operations and BCCI's
acquisition, without Board approval, of control of more than 25
percent of the voting shares of First American Bankshares and several
other U.S. banking operations.\2 The BNL case involved the discovery
that BNL's state-licensed agency in Atlanta allegedly failed to
report to bank examiners a large part of its banking business and may
have kept this lending secret from the parent bank. As a result, the
Board believed that it needed examination authority over BNL-Atlanta
to fully investigate the case. The Board also wished to have clear
authority to share bank examination information on a confidential
basis with foreign bank supervisors.
--------------------
\1 The legislation made changes to the authority of the Board of
Governors of the Federal Reserve System under the International
Banking Act of 1978.
\2 See Foreign Bank: Initial Assessment of Certain BCCI Activities
in the U.S. (GAO/GGD-92-96, Sept. 30, 1992).
THE MAIN PROVISIONS OF FBSEA
-------------------------------------------------------- Chapter 4:2.1
FBSEA's major provisions give the Board authority to approve all
branch, agency, or commercial lending company applications; terminate
the activities of state banking offices of foreign banks and
recommend to OCC that licenses of federal banking offices be
terminated; conduct examinations of branches, agencies, and
affiliates; and approve the establishment and examine the operations
of representative offices.
APPROVAL OF FOREIGN BANK
APPLICATIONS
-------------------------------------------------------- Chapter 4:2.2
Before the enactment of FBSEA, OCC had authority to review foreign
bank applications to establish and obtain licenses for federal
branches and agencies, while the applicable state authority did the
same for state branches and agencies. FBSEA requires that the Board
approve all state and federal applications to open branches,
agencies, and commercial lending companies. But the state
authorities and OCC are to continue to approve establishment and
remain the licensing authorities for state and federal banking
offices, respectively. Before FBSEA, states licensed representative
offices. The offices were required to register with the U.S.
Department of the Treasury, but this activity was more of a
record-keeping requirement. Therefore, foreign banks could open
representative offices in the United States without approval of any
federal regulatory agency.
FBSEA makes mandatory two standards in the Board's determination of
whether to approve the establishment of a foreign branch or agency:
(1) the foreign bank applicant must be engaged in the business of
banking outside of the United States, and the foreign bank applicant
must be subject to comprehensive supervision on a consolidated basis
by its home country supervisor; and (2) the foreign bank applicant
must provide sufficient information required by the Board to assess
the application. (Other factors will be discussed in the following
sections.)
For foreign banks already operating in the United States, FBSEA gives
the Board the authority to terminate, or recommend that OCC
terminate, a foreign bank's U.S. offices if the foreign bank is not
subject to comprehensive supervision on a consolidated basis by its
home country supervisors. FBSEA also requires the Board, in
consultation with the Secretary of the U.S. Department of the
Treasury, to develop criteria to evaluate the U.S. operations of
foreign banks that are determined not to be subject to such home
country supervision.
CONDUCT AND COORDINATION OF
EXAMINATIONS
-------------------------------------------------------- Chapter 4:2.3
FBSEA authorizes the Board to conduct examinations of branches,
agencies, commercial lending companies, and affiliates. The Board
may also examine any representative office. FBSEA requires the
Board, to the extent possible, to coordinate its examinations with
OCC, FDIC, and the appropriate state banking supervisor, and
authorizes it to conduct simultaneous examinations of such U.S.
offices and U.S. affiliates of a foreign bank. Each branch, agency,
or commercial lending company subsidiary of a foreign bank is
required to be examined on-site at least once during each 12-month
period.\3 The cost of examinations is to be assessed against and
collected from the foreign bank or the foreign bank company that
controls the foreign bank.\4
--------------------
\3 Examinations will be conducted by the Board; FDIC, if the foreign
bank branch accepts or maintains insured deposits; OCC, if the branch
or agency is licensed by OCC; or the state supervisor, if the office
of the foreign bank is licensed or chartered by the state.
\4 See Funding Foreign Bank Examinations (GAO/GGD-93-35R, May 4,
1993). The subject of examinations will not be treated further in
this report.
OTHER PROVISIONS
-------------------------------------------------------- Chapter 4:2.4
FBSEA makes state branches and agencies subject to regulation more
consistent with federal regulation by limiting their permissible
activities to the permissible activities of federally licensed
branches, with some exceptions as specified in the law.
FBSEA required that two formal studies be conducted. First, the
Board and the U.S. Department of the Treasury were to conduct a
comparative analysis of the capital standards applied to foreign
banks conducting banking operations in the United States and those
applied to U.S. banks. That study, the Capital Equivalency Report,
was completed in June 1992. The second analysis, the Subsidiary
Requirement Study, issued in December 1992, assessed whether foreign
banks in the United States should be required to operate as
separately incorporated subsidiaries and change their current branch
operations accordingly.
The Capital Equivalency Report\5 reviewed the capital standards of 22
countries that are the home countries to certain banks. These banks
hold approximately 97 percent of the total U.S. assets of foreign
banks operating in the United States. The report concluded that most
foreign banks are subject to equivalent, although not necessarily
identical, capital requirements as U.S. banks.
In the Subsidiary Requirement Study,\6 the Secretary of the Treasury
and the Board of Governors of the Federal Reserve System, in
consultation with OCC, FDIC, and the Attorney General, after
examining the factors contained in FBSEA, "would oppose a subsidiary
requirement that would be applied to all foreign bank operations
either across-the-board or for purposes of expanded powers." The
study concluded further that "subject to prudential considerations,
the guiding policy for foreign bank operations should be the
principle of investor choice."
--------------------
\5 See Capital Equivalency Report, U.S. Department of the Treasury
and Board of Governors of the Federal Reserve System (Washington
D.C.: June 19, 1992).
\6 See Subsidiary Requirement Study, Department of the Treasury and
Board of Governors of the Federal Reserve System (Washington, D.C.:
Dec. 18, 1992).
IMPLEMENTATION OF FBSEA BY THE
FEDERAL RESERVE
---------------------------------------------------------- Chapter 4:3
Enactment of FBSEA required revisions of both Regulation K
(International Banking Operations) and Regulation Y (Bank Holding
Companies and Change in Bank Control).\7 The Board issued an interim
rule on April 8, 1992, to be effective immediately, but with a 60-day
comment period. The Board issued its final rule on January 12,
1993.\8
FBSEA provides two mandatory standards the Board must apply in
determining whether to allow foreign bank applicants to establish
offices in the United States. These were adopted in the final rule.
The foreign bank must engage directly in the business of banking
outside the United States and be subject to comprehensive supervision
on a consolidated basis by its home country supervisor. It also must
provide sufficient information required by the Board to allow it to
assess the application. Regulation K, as amended, provides that a
foreign bank is subject to consolidated, comprehensive supervision by
its home country supervisor if the foreign bank
is supervised or regulated in such a manner that its home
country supervisor receives sufficient information on the
worldwide operations of the foreign bank (including the
relationships of the bank to any affiliate) to assess the
foreign bank's overall financial condition and compliance with
law and regulation.
Regulation K, as amended, lists five factors the Board is to apply to
determine whether the foreign bank applicant is subject to
comprehensive supervision on a consolidated basis. The Board
emphasizes in the rules that "the factors are simply indicia of
comprehensive, consolidated supervision. They are not mandatory
standards unto themselves." They include the extent to which the home
country supervisor of the foreign bank
ensures that the foreign bank has adequate procedures for
monitoring and controlling its activities worldwide;
obtains information on the condition of the foreign bank and its
subsidiaries and offices outside the home country through
regular reports of examination, audit reports, or otherwise;
obtains information on the dealings and relationships between the
foreign bank and its affiliates, both foreign and domestic;
receives from the foreign bank financial reports that are
consolidated on a worldwide basis, or comparable information
that permits analysis of the foreign bank's financial condition
on a worldwide, consolidated basis; and
evaluates prudential standards, such as capital adequacy and risk
asset exposure, on a worldwide basis.
FBSEA and Regulation K, as amended, also provide discretionary
standards the Board can apply to determining whether to approve the
establishment of foreign banks. They include
a determination of whether the home-country supervisor or the
foreign bank has consented to the proposed establishment of a
branch, agency, or commercial lending company subsidiary;
the financial resources of the foreign bank (including the foreign
bank's capital position, projected capital position,
profitability, level of indebtedness, and future prospects) and
the condition of any U.S. office of the foreign bank;
the managerial resources of the foreign bank, including the
competence, experience, and integrity of the officers,
directors, and principal shareholders; management's experience
and capacity to engage in international banking; and the record
of the foreign bank and its management in complying with laws
and regulations, and in fulfilling any commitments to, and any
conditions imposed by, the Board in connection with any prior
application;
a determination of whether the foreign bank's home- country
supervisor and the home-country supervisor of any parent of the
foreign bank share material information regarding the operations
of the foreign bank with other supervisory authorities;
a determination of whether the foreign bank has provided the Board
with adequate assurances that information will be made available
to the Board on the operations or activities of the foreign bank
and any of its affiliates;\9
a determination of whether the foreign bank and its U.S.
affiliates are in compliance with applicable U.S. law, and
whether the applicant has established adequate controls and
procedures in each of its offices to ensure continuing
compliance with U.S. law, including controls directed to
detection of money laundering or unsafe or unsound banking
practices.
Regulation Y was amended to reflect the requirement that a foreign
banking organization must file an application with the Board under
the Bank Holding Company Act in order to acquire more than 5 percent
of the shares of a U.S. bank or bank holding company.
--------------------
\7 12 C.F.R. Parts 211, 225, 263, 265, Docket no. R-7054.
\8 The final rule became effective upon publication in the Federal
Register.
\9 This determination should include information that the Board deems
necessary to determine and enforce compliance with the International
Banking Act of 1978, the Bank Holding Company Act, and other
applicable federal banking statutes. These assurances shall include
a statement from the foreign bank describing the laws that would
restrict the foreign bank or its parent from providing information to
the Board.
FBSEA IS ONE EXAMPLE OF
IMPLEMENTING BASLE PRINCIPLES
AT THE NATIONAL LEVEL
---------------------------------------------------------- Chapter 4:4
When a major piece of legislation such as FBSEA is enacted by the
United States, a leading financial market and a Basle Committee
member, it indirectly affects international banking supervision. It
sends a message to foreign banks and their bank supervisors that, in
order to participate in the U.S. banking system, they must meet
certain standards. FBSEA was enacted to improve the supervision of
foreign banks in the United States. In our view, neither its intent
nor the Board's mandate for its implementation includes improving
international banking supervision worldwide or promoting the Basle
Minimum Standards. FBSEA standards, however, are consistent with
Basle Committee principles, in particular the committee's 1992
Minimum Standards. FBSEA is one model for how to improve
international banking supervision at the national level in a manner
consistent with the 1992 Basle Minimum Standards, we believe.
The Federal Reserve Board states in its final rules amending
Regulation K that "although the United States subscribes to the Basle
Minimum Standards, these are only minimum standards, and the FBSEA
imposes a higher threshold." That is, FBSEA has a mandatory
requirement that foreign offices be subject to comprehensive
supervision on a consolidated basis. The Board may not approve an
application unless the bank applicant meets that standard. The Basle
Committee gives the host-country authority the discretion to approve
an applicant not subject to consolidated supervision, subject to
certain restrictions and provisos. FBSEA, however, addresses the
same issues as the minimum standards by aggressively pressing for the
adoption of consolidated supervision, a centerpiece of the Basle
Minimum Standards and a principle that originated with the
committee's 1983 revised concordat. In its advisory role, the
committee is providing a minimum, or baseline, from which countries
can begin to improve their international banking supervision.
Ideally, countries will, as did the United States, adopt into their
own laws standards consistent with, but more rigorous than, the
minimum.
Although FBSEA is more rigorous and demanding than the Basle Minimum
Standards, its provisions and implementing rules address the same
general issues. A detailed analysis of FBSEA and the Minimum
Standards will point out differences in the precise nature in which
the issues are addressed, including meaning, emphasis, and tone.
What is more important is that both provide a framework for
eliminating supervisory gaps, such as a lack of consolidated
supervision highlighted in the BCCI case. In fact, a majority of the
foreign bank supervisors and experts with whom we spoke believed that
the Federal Reserve Board should apply Basle Committee principles in
its implementation of FBSEA, wherever possible.
Both FBSEA's mandatory standards and the Minimum Standards address
the need for consolidated supervision. Furthermore, both FBSEA's
"basis for determining comprehensive supervision or regulation on a
consolidated basis" and the Minimum Standards address the extent to
which the home supervisor considers the bank's operating procedures,
obtains information from the bank's cross-border business, monitors
relationships between the bank and its affiliates, receives
consolidated financial reports on the bank's worldwide operations,
and addresses the bank's capital adequacy.
Turning to FBSEA's discretionary standards, both FBSEA and the
Minimum Standards address whether the home-country supervisor has
approved the bank's attempt to establish a foreign office, reviewed
the managerial and financial resources of the bank, and considered
the extent to which the bank's home-and host-country supervisors have
arranged to share information about the operations of the bank.
FBSEA's intent is not to limit foreign bank participation in the U.S.
market. Its provisions bring supervision of foreign banking
facilities more in line with existing levels of domestic bank
supervision in the United States. Federal Reserve Board officials
admitted that, as required under FBSEA, making determinations about
the adequacy of foreign supervision will be diplomatically sensitive.
The foreign bank supervisors and experts with whom we spoke generally
considered the FBSEA provisions to be reasonable and in keeping with
the Basle Minimum Standards. Their only real concern was with
FBSEA's mandated study on the advisability of requiring foreign
branches in the United States to "roll up" their current branch
operations into separately incorporated U.S. bank subsidiaries.
Foreign bank supervisors believed that not allowing operations
through foreign branches would result in inefficient allocation of
capital and seriously limit the types and volumes of loans foreign
banks could make, since a subsidiary is limited to its own capital,
whereas a branch has access to the parent's capital. One foreign
supervisor and an EC official believed such a restriction would cause
excessive administrative costs.
On a broader scale, bank supervisors around the world share the U.S.'
concerns about gaps in the oversight of international banks, in
particular BCCI. This international concern prompted the Basle
Committee to introduce its Minimum Standards for supervision of
international banks. FBSEA could be one model of how to adopt into
law certain rules and regulations consistent with these Basle Minimum
Standards and an example of how national bank regulators can begin to
apply formally in practice what they have informally committed to in
principle through membership and participation in the Basle
Committee.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 4:5
OCC expressed concern about our conclusion that FBSEA could be one
model of how nations might implement into law the principles espoused
by the Basle Committee. The Federal Reserve Board and FDIC did not
comment on this issue.
OCC noted that there are differences between FBSEA and the Basle
Committee's Minimum Standards and questioned our contention that
national standards more stringent than the Minimum Standards can be
consistent with the Minimum Standards. OCC noted that FBSEA was not
the only statute, but a piece of the foundation the United States
built to supervise foreign banks operating in the United States. OCC
also noted that delays have occurred in processing applications under
the new law.
Our conclusion that FBSEA can serve as a model is based not only on
its shared objectives with the Basle Committee and its greater
stringency, but also on the fact that it mandates that the Board
consider the same criteria in approving foreign bank applications
that the Basle Committee would advance. The principal difference, as
the report notes, is that FBSEA requires that countries have a system
of consolidated supervision in place, while the committee would
accept progress toward that same goal.
We focused on FBSEA in this report because it is the most recent
statute dealing with U.S. regulation of foreign banks operating in
the United States. As we note in the report, the act was designed to
strengthen the supervision and regulation of foreign banks operating
in the United States. We also note in the report that the Federal
Deposit Insurance Corporation Improvement Act of 1991, of which FBSEA
is title II, subtitle A, made changes to the authority of the Board
of Governors of the Federal Reserve System under the International
Banking Act of 1978.
OCC noted that implementation of FBSEA has led to "long delays in
processing foreign bank applications." As we describe in our report,
the Board is charged with implementing FBSEA. In our meetings with
them, Board officials noted that foreign bank applications were
taking longer, in part because the Board staff was being cautious on
the initial applications until decisions by the Board provided them
with more specific guidance on handling these applications.
OTHER INTERNATIONAL GROUPS THAT
PROMOTE ENHANCED INTERNATIONAL
BANKING SUPERVISION
=========================================================== Appendix I
The European Community (EC--now called the European Union), the
Organization for Economic Cooperation and Development (OECD), and
other groups have worked on their own and in conjunction with the
Basle Committee on Banking Supervision to coordinate and enhance
international banking supervision worldwide.
THE EUROPEAN COMMUNITY
--------------------------------------------------------- Appendix I:1
The Treaty of Rome, signed in 1957, laid the foundation for the EC,\1
a common market based on the free movement of goods, persons,
services, capital, and banking. Despite some progress toward
integration, internal barriers remained, and many Europeans believed
that relatively slow European economic recovery from the global
recession of the 1970s was, in part, caused by multiple trade
barriers and overly protected markets.
In 1985, the EC formally launched its Single Market Program by
issuing the White Paper, "Completing the Internal Market," which
identified trade barriers and proposed a series of 300 measures
(later reduced to 279) necessary to abolish them. The White Paper
set forth a regulatory framework to achieve a single European market,
proposed a timetable for enactment of each measure, and required the
entire program to be in place by the end of 1992. The Single
European Act of 1987 reaffirmed the White Paper's objectives and
accelerated the market integration process by changing the way EC
legislation is passed for most single market initiatives.\2
The EC bases the regulatory framework for its single market in
financial services upon three principles: a single banking license,
home-country control, and mutual recognition. The single banking
license (or "single passport") allows any bank established and
licensed in one member state to provide cross-border banking or
establish branches in any other EC member state. Non-EC banks are
also eligible for the single banking license, as long as they
incorporate an EC subsidiary in any one of the member states. The
single license is based on the principle of mutual recognition. This
principle requires that member states have a minimum level of
harmonization to ensure the safety and soundness of the financial
system. For instance, to qualify for the single license, banks must
have a minimum capital base, a minimum level of shareholder
disclosure, and a maximum limit on the degree of equity participation
in nonfinancial firms. Home-country control means that, under the
single passport, a bank has the same powers and is subject to the
same home-country supervision and regulatory limits regardless of
where its services are rendered.\3
The EC addresses issues similar to those addressed by the Basle
Committee and has relied on committee principles in formulating its
Single Market Program. Common issues include setting capital
adequacy standards for banks and investment firms, requiring
supervision on a consolidated basis, and generally establishing
common standards for bank supervision to ensure the safety and
soundness of the banking system.
The EC model, however, is quite different from that of the Basle
Committee. The Basle Committee is an informal body with no legal
basis or enforcement authority. The EC is a formal, regulatory body
consisting of four supranational institutions: the EC Commission,
the executive body that drafts and proposes legislation and enforces
the implementation of EC law; the Council of Ministers, which for
financial decision-making consists of the finance ministers of each
member state; the European Parliament, a primarily advisory body
directly elected by EC citizens; and the European Court of Justice,
which ensures that EC legislation is interpreted and applied
according to the principles of EC law.\4
The EC's single passport may conflict somewhat with the Basle
Committee's 1992 Minimum Standards. The Basle Committee assigns the
host supervisor a fair amount of discretion in its dealings with
foreign banks. The committee states in its Minimum Standards that if
the host-country supervisor determines that any of the minimum
standards is not met by the supervisor of the foreign bank seeking to
establish a banking operation within its jurisdiction, the host
supervisor can impose "restrictive measures necessary to satisfy its
prudential concerns consistent with these minimum standards,
including the prohibition of the creation of banking establishments."
In contrast, under the EC Single Market Program, the host-country
supervisor must accept the bank's home-country supervision as broadly
equivalent to its own according to the principles of the single
market and mutual recognition. EC member supervisory authorities
with whom we spoke said that, in practice, host and home supervisors
will cooperate closely in overseeing the opening of bank branches
across EC country borders and in ensuring that those branches are
supervised adequately. Some EC countries, including France and
Germany, have drawn up Memoranda of Understanding between bank
supervisors concerning cooperation between the home and host
authorities to agree on how to address the specifics of managing
these situations.
The EC coordinates its efforts with the Basle Committee, whose
membership includes 7 of the 12 EC member nations. At the time of
our review, the Basle Committee was working with the International
Organization of Securities Commissions (IOSCO)\5 to reach agreement
on capital adequacy standards for financial firms that conduct
securities-related activities, including "universal"\6 banks, and
those that do not. The EC has adopted the Directive on the Capital
Adequacy of Investment Firms and Credit Institutions, but included a
provision in the directive requiring a review in 3 years to ensure
that its provisions take into account developments such as the Basle
Committee's and IOSCO's eventual initiative.
The EC Banking Advisory Committee, established in 1979 pursuant to
article 11 of the First Banking Coordination Directive, is composed
of up to three representatives from each member state, and from the
EC Commission, which also provides its Secretariat. One task of the
committee is to ensure the proper implementation of EC directives in
the banking field.
--------------------
\1 The EC consists of 12 member nations: Belgium, Denmark, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, and the United Kingdom.
\2 Only a weighted majority of member states is required to approve
the adoption of a proposed directive. Known as "qualified majority
voting," voting weights are assigned to each state loosely according
to its population and economic power. Previously, unanimity was
required, and one member state could block legislation. Votes on
social and tax matters still require unanimous approval.
\3 The host supervisor retains primary responsibility for the
supervision of liquidity and exclusive responsibility for monetary
policy. It also may retain some control over advertising of banking
services in its territories. The host supervisor has the broad
authority to apply some restrictions on the grounds of public policy
or general public interest.
\4 For a full discussion of the Single Market Program and EC
institutions and their functions, see European Community: U.S.
Financial Services' Competitiveness Under the Single Market Program
(GAO/NSIAD-90-99, May 21, 1990).
\5 IOSCO is made up of securities regulators from more than 40
countries. The organization's primary purposes are providing
coordination, exchanging information, establishing standards and
effective surveillance, and giving mutual assistance to ensure the
integrity of the markets.
\6 Under "universal" banking, banks can underwrite debt and equity
securities and conduct other nonbanking activities.
ORGANIZATION FOR ECONOMIC
COOPERATION AND DEVELOPMENT
(OECD)
--------------------------------------------------------- Appendix I:2
OECD, part of the system of western international institutions
developed after World War II, is the main forum for monitoring
economic trends in its 24 member countries\7 --free market
democracies of North America, Western Europe, and the Pacific. OECD
is the largest source of comparative data on the industrial economies
in the world. It produces economic surveys, statistical analyses,
and policy recommendations on trade, banking, and financial markets;
employment; social policies; the environment; agriculture; energy;
industry; development aid; science and technology; research and
development; taxation; education; transportation issues; and more.
OECD uses a "common approach" to public policy, which means that its
discussions generally yield consensus. As a result, it can establish
"codes of behavior" to which the participants formally bind
themselves. For example, OECD has several agreements, including a
code on the liberalization of capital movements.
The objectives of OECD include (1) achieving the highest sustainable
economic growth and employment, (2) promoting economic and social
welfare throughout OECD by coordinating the policies of its member
countries, and (3) stimulating and harmonizing its members' efforts
in favor of developing countries. OECD attempts to achieve its
objectives in the banking and financial sectors through its
Directorate for Financial, Fiscal, and Enterprise Affairs. This OECD
directorate is responsible for the following banking-related
activities:
encouraging structural reforms in the financial sector (including
insurance) and developing international cooperation in financial
regulation and financial system management;
reinforcing and implementing guidelines of international economic
and financial cooperation, especially in the liberalization of
capital movements, trade in services, and foreign direct
investment;
identifying policies to create the conditions for a mutually
beneficial investment climate for investors as well as home and
host countries; and
developing competition and consumer policies that enhance economic
efficiency and consumer information and welfare.
In 1980, the OECD's Committee on Financial Markets created an Expert
Group on Banking to identify and assess significant changes in its
member countries' banking structures and regulations. This group
consists of bank supervisory, central bank, and finance ministry
officials from 23 of the 24 OECD countries, including all the Basle
Committee nations plus 11 other countries.
Unlike the Basle Committee, the Expert Group on Banking, according to
its secretary, has a mandate to assess the policy implications raised
by contemporary developments in banking. The group has issued
reports on the internationalization of banking and on electronic
funds transfer.
--------------------
\7 OECD member countries are Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the
United States. The former Yugoslavia was granted special status in
1961.
OTHER REGIONAL GROUPS
--------------------------------------------------------- Appendix I:3
The Basle Committee on Banking Supervision routinely coordinates its
efforts with at least eight other regional supervisory groups.
NORDIC SUPERVISORY GROUP
------------------------------------------------------- Appendix I:3.1
This group was organized in 1925, reflecting the close collaboration
that has long existed among the Nordic countries. Consisting of
representatives of the supervisory authorities of Denmark, Finland,
Iceland, Norway, and Sweden, its meetings initially were formal and
almost diplomatic in nature. More recently, it has emphasized more
frequent, less formal sessions. Its primary aim has been to exchange
information regarding experiences in supervising each nation's banks,
not to harmonize the national banking legislation of its members.
OFFSHORE GROUP OF BANKING
SUPERVISORS
------------------------------------------------------- Appendix I:3.2
This group was formed in 1980 because of concern about the level of
banking supervision existing in offshore banking centers; 19 centers
are represented in the group--Aruba, the Bahamas, Bahrain, Barbados,
Bermuda, the Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong,
the Isle of Man, Jersey, Lebanon, Malta, Mauritius, the Netherlands
Antilles, Panama, Singapore, and Vanuatu. Since its creation, it has
seen its role as building relationships among the supervisors of
these offshore centers as well as between them and other supervisory
authorities. Since its inception, this group has developed a close
dialogue the Basle Committee.
In 1982, the group and the Basle Committee agreed on a number of
principles designed to promote supervisory cooperation. In
particular, the offshore centers represented in the group agreed not
to obstruct the flow of information from offices in their countries
to parent banks, thereby facilitating consolidated supervision by
parent authorities. In 1987, the group met to discuss several
issues. The issues included using external auditors in supervising
banks; obtaining access to parent banks' internal audit reports;
reviewing banks' internal control systems and documentation;
reviewing the relevance of parent bank guarantees, or loan take-over
agreements as a substitute for capital; implementing the
recommendations in the Basle Committee and Offshore Group joint paper
on information flows; and supervising branches when the parent seeks
to limit its responsibility. In 1988 and 1989, the group addressed
the following issues: (1) authorization procedures for cross-border
banks, (2) information needs of parent authorities, (3) information
needs of host authorities, (4) banking secrecy, (5) the role of the
external auditor, (6) capital adequacy, and (7) criminal use of the
banking system. In 1991, the group concluded that the BCCI affair
indicated that the principles in the 1983 revised concordat and
recommendations in the 1990 supplement were not being implemented
fully and effectively. In addition, the group reviewed the
recommendations of the Financial Action Task Force's 1990 report on
money laundering. Finally, the group agreed to enhance its profile
as an organization actively promoting effective supervision of banks
in accordance with international standards.
COMMISSION OF LATIN AMERICAN
AND CARIBBEAN BANKING
SUPERVISORY AND INSPECTION
ORGANIZATIONS
------------------------------------------------------- Appendix I:3.3
All national agencies in the Latin American and Caribbean area
responsible for the supervision and inspection of banks are eligible
for membership in this group, created in 1981. As of September 1990,
the group consisted of 23 member organizations.
The purpose of this group is to promote close relationships among
these bank supervisory agencies; to discuss mutual problems; and to
encourage research, training, and technical assistance related to
bank supervision. It has invited representatives from the Basle
Committee and other supervisory authorities to attend its annual
meetings as observers. In 1987, the commission met separately and
with representatives from several other countries, including Basle
Committee representatives, to discuss several issues. The following
issues were discussed: the role of external auditors, the
classification of assets and credit concentration; and capital
adequacy, capital and asset valuations, powers to intervene in banks'
operations, foreign exchange risk and capitalization of external
debt, information exchanges, and training. The commission also
addressed the supervision of bank agencies, branches, and
subsidiaries outside the home-country; the criteria for determining
capital provisions; the supervision of financial groups; and
operations associated with buying and selling public and private
external debt and their effects on financial statements. From 1988
through February 1990, the commission held three meetings, which
included representatives from the United States (the Federal Reserve,
the Office of the Comptroller of the Currency (OCC), and the Treasury
Department), the World Bank, and the Basle Committee. The issues
covered in these meetings included capital adequacy and its relation
to asset quality, risk concentration and the establishment of
regulations, basic information for bank supervision and surveillance,
risk analysis regarding economic conglomerates; assessment of
financial investment, and safety mechanisms such as deposit
insurance. In 1991, the commission issued the Proposal for the
Classification of Credit Assets of Financial Institutions, which
contains generally accepted minimal standards that reconcile the
differences in the classification of credit assets.
SOUTHEAST ASIA, NEW ZEALAND,
AND AUSTRALIA FORUM OF
BANKING SUPERVISORS
------------------------------------------------------- Appendix I:3.4
This group held its initial meeting in November 1984, with
representatives present from supervisory agencies throughout
Southeast Asia and the Pacific Basin. Japan, a member of the Basle
Committee, is also a member of this group, thus providing a link
between the two bodies.
In 1988, the forum met to discuss several issues, including capital
convergence, off-balance-sheet instruments, liquidity management,
large exposures, risk management, overseas branch supervision, and
internal and external auditors' roles. The forum's 1990 meeting
included representatives from the United Kingdom, the United States,
Hong Kong, and the Basle Committee. The meeting addressed (1)
supervising banks in a deregulated environment and the resulting
integration of financial markets, (2) developing sound internal
controls by commercial banks, and (3) assessing the roles of
supervisors and external auditors.
GULF CO-OPERATION COUNCIL
COMMITTEE OF BANKING
SUPERVISORS
------------------------------------------------------- Appendix I:3.5
Instituted in 1981, the Gulf Co-operation Council promotes
coordination between the Gulf States, which include Bahrain, Kuwait,
Saudi Arabia, Oman, Qatar, and the United Arab Emirates. In
addition, a permanent committee of the governors of the central
monetary authorities was formed to foster closer monetary
harmonization. This committee subsequently established a Committee
of Banking Supervisors, whose responsibilities included reviewing and
coordinating the different banking laws and supervision procedures,
studying banking supervision issues and problems, and acting as a
liaison with other supervisory bodies.
In 1990, the council held a joint meeting with the Basle Committee
and addressed topics such as capital adequacy, information flows
between banking supervisors, large risk exposures, and international
accounting standards. In 1991, the council began implementing a
risk-based capital adequacy scheme, which resembles the Basle
Committee capital accord adjusted for local conditions.
GROUP OF BANKING SUPERVISION
OFFICIALS IN ARAB COUNTRIES
------------------------------------------------------- Appendix I:3.6
This group was established pursuant to a resolution adopted in 1991
by the Council of Governors of Arab Central Banks and Monetary
Agencies. It consists of representatives of virtually all Arab
central banks and monetary agencies and the Arab Monetary Fund. The
group is charged with studying the decisions of the Basle Committee
on Banking Supervision, particularly those concerning international
convergence of capital measurement and capital adequacy requirements.
Its goal is to determine and assess both the short- and long-term
impact of their implementation on the Arab banking sector and to
recommend a coordinated, pragmatic, Arab approach toward the issues
involved.
THE CARIBBEAN BANKING
SUPERVISORS GROUP
------------------------------------------------------- Appendix I:3.7
Representatives from 21 countries, including visitors from the United
States, the United Kingdom, Canada, and the Basle Committee on
Banking Supervision attended this group's 1990 meeting. The meeting
focused on preventing the banking system from being used for criminal
purposes.
The group's 1991 and 1992 meetings were attended by representatives
from Antigua, Aruba, the Bahamas, Barbados, Belize, Bermuda, the
British Virgin Islands, the Cayman Islands, Dominica, Grenada,
Guyana, Haiti, Jamaica, Montserrat, the Netherlands Antilles, Puerto
Rico, St. Kitts, St. Lucia, Surinam, and Trinidad. The topics
discussed at this meeting included supervisory challenges in the
1990s; banks' supervision of a monetary union; establishment of an
effective legislative and regulatory framework for managing problem
institutions; liberalization of the financial system; capital
adequacy; the role of regional central banks in supervising credit
unions and insurance companies; and harmonization of supervisory
practices and policies, loan classification criteria, and loan-loss
provisions.
GROUP OF BANKING SUPERVISORS
FROM CENTRAL AND EASTERN
EUROPEAN COUNTRIES
------------------------------------------------------- Appendix I:3.8
The main purpose of this group is to facilitate the exchange of
information on supervisory policies and practices and to further
practical cooperation, not only among members but also with other
regional groups and international organizations. The group's goal is
to ensure that policy responses by supervisory authorities in Eastern
Europe experiencing common problems are consistent with practices
within and outside of Western Europe.
Representatives from Bulgaria, the Czech Republic, Hungary, Poland,
Romania, Slovakia, and the former Soviet Union attended the group's
1991 and 1992 meetings. The topics discussed in these meetings
included developing supervisory skills, preparing new banking acts in
Eastern Europe, regulating foreign exchange activities, identifying
and managing bad loans inherited from the past, assessing and making
provisions for loan portfolios, supervising banks' information
systems, and preventing money laundering. The group has solicited
the Basle Committee secretariat's assistance in organizing its
efforts.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
=========================================================== Appendix I
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)Appendix III
COMMENTS FROM THE COMPTROLLER OF
THE CURRENCY
=========================================================== Appendix I
(See figure in printed edition.)
See comment 1.
Now on p. 46.
See comment 2.
(See figure in printed edition.)
The following are GAO's comments on the Comptroller of the Currency's
letter dated November 22, 1993.
GAO COMMENTS
--------------------------------------------------------- Appendix I:4
1. OCC interpreted the draft as proposing that a supranational
regulatory body would be the preferred approach to coordination and
believed that we should provide additional analysis to support this
contention. We have changed the report to clarify that we are
reporting the views of one prominent academic expert, and have
explicitly referenced his writings and testimony to emphasize that
the concept of supranational supervision is his view, not one that we
are advancing.
2. OCC expressed concern that our reference to "one other BCCI" which
was identified as doing international banking business, could raise
questions and have "unintended negative effects." We have revised
that section of the report to clarify that the "other BCCI" was
mentioned by supervisory officials with whom we spoke and that the
officials did not identify either the name or the scope of the bank's
international activities. Our reference to the bank was meant to
emphasize that supervisory officials continue to find situations that
warrant a coordinated international response.
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
=========================================================== Appendix I
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix V:1
James McDermott, Assistant Director
Nina Pfeiffer, Evaluator-in-Charge
Robert Shields, Evaluator
Rona Mendelsohn, Reports Analyst
NEW YORK REGIONAL OFFICE
--------------------------------------------------------- Appendix V:2
John Tschirhart, Adviser