The International Banking Regulatory Architecture

Question 1

What are the Core Problems in International Banking Regulation (IBR)?

Answer 1

Inter-jurisdictional Arbitrage and Contagion.

Question 2

Why is IBR particularly Prescient today?

Answer 2

Banks are increasingly globally interconnected, thus exacerbating the danger of contagion, e.g. TBTF Banks and the GFC.

Question 3

Of the various gambit of risks, which are especially Relevant to International Banks?

Answer 3

Currency and Country Risk.

Question 4

What is Currency Risk?

Answer 4

The risk that fluctuations in foreign exchange rates will adversely affect a bank’s operation.

Question 5

What is Country Risk?

Answer 5

The risk that changes in foreign country’s politico-legal or economic conditions will adversely affect a bank’s operation.

Question 6

Why are National Regulators ill-equipped to oversee International Banks?

Answer 6

• Information asymmetries which hamper the capacity to oversee the bank’s entire operation.
• Inter-jurisdictional legal and regulatory arbitrage.
• Home-Host Country ambiguities of responsibility.

Question 7

What has been the Solution to National Regulators’ incapacity to regulate International Banks?

Answer 7

The development of an international financial architecture which encourages coordination and cooperation between national regulators.

Question 8

Which institutions form the Central Pillars of the International Financial Architecture (IFA)?

Answer 8

The Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB).

Question 9

What is the Function of the BCBS?

Answer 9

To formulate standards and guidelines, and make recommendations to national regulators in the expectation that they will be implemented.

Question 10

Are the BCBS’s edicts binding?

Answer 10

No. They are soft law.

Question 11

How are Countries represented on the BCBS?

Answer 11

By either their central bank or prudential regulator.

Question 12

Why are the BCBS’s edicts widely observed?

Answer 12

Its Members’ power and clout afford the body great global influence, such that when they implement a recommendation, other countries are likely to do the same.

Question 13

How else does the BCBS encourage compliance with its edicts?

Answer 13

Using its Regulatory Consistency Assessment Programme (RCAP), which evaluates whether and to what extent naitonal regulators implement its edicts, e.g. Basel III.

Question 14

According to Cranston, what is the practical effect of the RCAP?

Answer 14

It, “harden[s] the edges of [the BCBS’s] status as a soft law body.”

See: Cranston et al., Principles of Banking Law, 21.

Question 15

In what ways it the use of Soft Law in Financial Regulation advantageous?

Answer 15

It is politically sensitive and quick and flexible due to its informality.

See: Lee, The Soft Law Nature of Basel III and International Financial Regulations 607.

Question 16

What is the Function of the FSB?

Answer 16

• To monitor and advise on market developments and their regulatory implications;
• To formulate standards and guidelines thereupon; and
• To aid in the establishment and maintenance of supervisory colleges.

For more, see: P. 199.

Question 17

Are the FSB’s edicts binding?

Answer 17

No. They are soft law. Due to its extensive base and similar modus operandi to the BCBS, it has been very successful.

See: P. 198-199.

Question 18

Orbiting the BCBS and the FSB, what other institutions comprise the IFA?

Answer 18

• The International Monteary Fund (IMF).
• The World Bank (WB).
• The Committee on the Global Financial System (CGFS).
• The Committee on Payments and Market Infrastructures (CPMI).
• The Joint Forum (JF).
• The Financial Stability Institute (FSI).
• The Financial Action Task Force (FATF).

Question 19

What was the Basel Concordat of 1975?

Answer 19

A convention which established guidelines for the cooperation of natinonal regulators regarding the supervision of international banks’ foreign establishments.

Question 20

How did the Basel Concordat of 1975 categorize Foreign Establishments?

Answer 20

By devising the following classes:

• Branch: Integral part of a foreign parent bank.
• Subsidiary: Legally independent and domestically-incorporated institution that is controlled by a foreign parent bank.
• Joint Venture: Legally independent and domestically-incorporated institution that is controlled by two or more mostly foregin institutions.

Question 21

According to which Metrics did the Basel Concordat of 1975 propose to frame Bank Supervision?

Answer 21

Liquidity and Solvency risk and Foreign Exchange exposure.

Question 22

How did the Basel Concordat of 1975 encourage Regulatory Cooperation?

Answer 22

By promoting:

• Free-flowing information between Home-Host authorities.
• Home authorities’ ability to directly inspect a domestic bank’s foreign establishments; and
• Home authorities’ ability to indirectly inspect a domestic bank’s foreign establishments through reliance on host authorities.

Question 23

Under the Basel Concordat of 1975, how were Regulatory Responsibilities divided?

Answer 23

Generally, liquidity and solvency supervision rested with the Host, subject to Home authority’s cooperation. ForEx exposure was more jointly endeavored.

Question 24

What was the Purpose of the 1983 Revision of the Basel Concordat?

Answer 24

To provide a more sophisticated account of Home-Host authority supervision of foreign establishments.

Question 25

What are the Central Principles of 1983 Revision?

Answer 25

That no foreign banking establishment should escape supervision and that supervision should be adequate across the board.

Question 26

More than anything, what did the 1983 Revision emphasize?

Answer 26

That international supervision was a multi-lateral endeavor which required the full and adequate participation of all parties.

Question 27

How did the 1983 Revision amend the Division of Responsibility regarding Liquidity?

Answer 27

• Branch: Joint responsibility.
• Subsidiary: Joint responsibility.
• Joint Venture: Joint responsibility.

Question 28

How did the 1983 Revision amend the Division of Responsibility regarding Solvency?

Answer 28

• Branch: Primarily the Home authority’s responsibility.
• Subsidiary: Joint responsibility.
• Joint Venture: Joint responsibility.

Question 29

How did the 1983 Revision amend the Division of Responsibility regarding Foreign Exchange Operations?

Answer 29

All foreign exchange operations are the joint responsibility of both Home and Host authorities.

Question 30

What was the Ultimate Effect of the 1983 Revision?

Answer 30

To consolidate the practice of international supervision.

See also: BCBS, Minimum Standards for the Supervision of International Banking Groups and their Cross-Border Establishments (July 1992).

Question 31

What are the Basel Core Principles (BCPs)?

Answer 31

The de facto minimum standards for the sound prudential regulation of banks.

See: BCBS, Core Principles for Effective Banking Supervision (2012),

Question 32

What do the BCPs pertain to?

Answer 32

P. 1-13 address supervisory powers, responsibilities, and functions, emphasizing risk-based analysis and proactivity. P. 14-29 address banks’ expectations, e.g. risk management and corporate governance.

Question 33

How is Compliance with the BCPs assessed and measured by the BCBS?

Answer 33

With reference to a set of essential criteria and a four-grade scale.

See: P. 213-214.

Question 34

What is a Supervisory College?

Answer 34

“A multilateral working group of relevant supervisors that are formed for the collective purpose of enhancing effective consolidated supervision of an international banking group on an ongoing basis.”

See: BCBS, Priciples for Effective Superivsory Colleges (June 2014), Principle 1-7.

Question 35

What are Intended Goals of forming a Supervisory College?

Answer 35

• Enhance information-sharing and communication;
• Develop common understandings of international banks;
• Coordinate supervisors’ agendas; and
• Increase the net quality of supervision.

See: BCBS, Priciples for Effective Superivsory Colleges (June 2014), Principle 1

Question 36

How are Supervisory Colleges to be structured?

Answer 36

In a way which enhances the efficacy of overseeing international banks. This entails the creation of, where necessary:

• A Core College;
• A General College;
• A Global College; and
• A Regional Core College.

See: BCBS, Priciples for Effective Superivsory Colleges (June 2014), Principle 2.

Question 37

Principles 1 and 2 pertain to Objectives and Structure. What do Principles 3-7 pertain to?

Answer 37

• Principle 3: Information Sharing.
• Principle 4: Communication Channels.
• Principle 5: Supervisory Collaboration.
• Principle 6: Interaction with the Banking Group.
• Principle 7: Crisis Preparedness.

Question 38

What Obstacles do Supervisory Colleges regularly face?

Answer 38

• Worries regarding the confidentiality of information shared;
• Power imbalances within the structures;
• Occasional unavailability of expertise and resources;
• Operational difficulties, e.g. language barriers or secrecy laws.
• Insufficient understanding of each other’s legal systems.
• Insufficient crisis prepardedness.

BCBS, Progress Report on the Implementations of Principles for Effective Supervisory Colleges (July 2015) and (December 2017).

Question 39

What is the College Meeting Cycle?

Answer 39

The stages at which Colleges meet on any given year, namely:

• Pre-College Meeting (prepartory);
• Formal College Meeting (executive);
• Post-College Meeting (retrospective); and
• Between College Meetings (ad hoc).

BCBS, Progress Report on the Implementations of Principles for Effective Supervisory Colleges (December 2017).

Question 40

What is a Systemically-Important Financial Institution (SIFI)?

Answer 40

A financial institution whose failure might trigger a financial crisis.

Question 41

Post GFC, how have SIFIs been treated by the IFA?

Answer 41

With greater vigilance.

See: P. 222-223. FSB, Intensity and Effectiveness of SIFI Supervision Recommendations; FSB, Supervisory Intensity and Effectiveness: Progress Report on Enhanced Supervision (April 2014).