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The Supervision of Cross-Border Banking

Introduction and Background

The Minimum Standards for the supervision of international banking groups and their cross-border establishments, issued by the Basle Committee on Banking Supervision in July 1992, establishes four main principles:

1. All international banks should be supervised by a home country authority that capably performs consolidated supervision.

2. The creation of a cross-border banking establishment should receive the prior consent of both the host country and the home country authority.

3. Home country authorities should possess the right to gather information from their cross-border banking establishments.

4. If the host country authority determines that any of these three standards is not being met, it could impose restrictive measures or prohibit the establishment of banking offices.

At the end of 1994, a working group comprised of representatives of the Basle Committee and of the Offshore Group of Banking Supervisors was set up to consider a number of issues relating to the implementation of the Minimum Standards with a view to overcoming the impediments to effective cross-border supervision. Although, because of the group's composition, its discussions focused principally on the supervision of offshore banking, its conclusions are applicable to all home and host supervisory relationships and have been framed as such.

The working group believes that supervisors have the right to apply whatever supervisory techniques they commonly use on an ongoing basis in order to fulfil the Minimum Standards. However, in some cases impediments remain. The report examines the nature of these impediments and identifies practical arrangements to enable supervisors to implement the Standards, using their regular supervisory techniques. The problems in achieving this objective which the working group has identified fall into two main categories. These issues are addressed sequentially in the main body of the paper:

(a) The first set of problems relates to the third of the Standards set out above, namely information access. In particular, home country supervisors ("home supervisors") either have experienced or perceive difficulties in obtaining all the information they require in order to undertake effective consolidated supervision. Bank secrecy legislation remains an impediment in certain circumstances and jurisdictions. Moreover, there are still impediments in certain countries to the conduct of certain long-established techniques and procedures, including cross-border on-site inspections by home supervisors. Conversely, host supervisors also need information from home supervisors if they are to exercise effective host supervision.

(b) The second set of problems relates to the more general principle laid down in the Concordat that all cross-border banking operations should be subject to effective home and host supervision. In particular:

- host country supervisors ("host supervisors") have no common standard to judge what constitutes effective consolidated supervision by home supervisors and whether it is being exercised as required by the first Minimum Standard;

- in deciding how best to carry out effective consolidated supervision, home supervisors need a mechanism to assess the standards of supervision exercised by host supervisors. The Offshore Group has established minimum criteria for its members and is seeking assistance from the Basle Committee in determining whether individual offshore centres meet those criteria;

- gaps in supervision (e.g. booking offices in the form of so-called "shell branches", parallel-owned banks, i.e. "sister" institutions with common ownership, and parent institutions incorporated in under-regulated financial centres) continue to pose a threat to the principle of the Concordat that no banking establishment should escape supervision.

In moving towards effective compliance with the Minimum Standards, and with the recommendations in this document, the working group believes that the intention in the 1992 document that countries should be actively working to ensure compliance needs to be reaffirmed at the Stockholm ICBS with a positive commitment from all participants. In order to set some form of target for possible legislative changes, it proposes that the ICBS be asked to agree to review the evidence of individual countries' implementation of the Standards and the recommendations herein by means of a survey in time for the 1998 ICBS. The group observes that at some stage authorities that are unable to obtain satisfactory evidence that a specific country has implemented the Standards will decide to introduce the sanctions referred to in the Fourth Standard or to limit their banks' operations in certain overseas jurisdictions.


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