Finances of International Banking
This article focuses on the International Banking Supervision system and how the Bank of International Settlements and the Basel Committee on Banking Supervision relate to it. The establishment of the Basel Committee was a significant point in the history of international banking supervision. The Basel Committee has made two major contributions since its inception.
Keywords Bank of International Settlements; Basel Committee on Banking Supervision; Basel II; G-10 Group; Gramm-Leach-Bilely Act; Market Risk; Operational Risk
Finances: Finances of International Banking
"The present international, regional, and national rules on banking supervision are strongly permeated by a high degree of fluidity directly descendent both from the revolution of principles and techniques steering the global financial markets, and from the connected difficulty of the nation States to face the new technological challenges" (Ortino, 2004, p. 715). Policymakers, experts, and scholars will need to analyze and evaluate the level of fluidity when attempting to implement policies and regulations to govern global financial markets. The changes in information technology have challenged the European States by requiring them to evaluate the political and economic systems that they have in place.
International Banking Supervision
According to Ortino (2004), there are two specific features of the institutional order as it relates to banking supervision at an international level.
- First of all, national legislators are responsible for setting up the legal norms and developing the foundation for the proper power structure and procedures.
- Second, the powers of the banking supervision authorities are assigned by the banking sector.
These features are encouraging banking supervision authorities to work together as well as with supervisory authorities in other financial sectors.
Basel Committee on Banking Supervision
One entity that works at the international level is the Basel Committee on Banking Supervision. This entity was set up in December, 1974 by the central bank governors of the group 10 nations, and meets four times a year. The membership includes representation from countries such as Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. The countries meet in order to consult on economic, monetary and financial matters. The purpose of the committee is to discuss how to handle supervisory problems, such as global financial crises. Although the Committee coordinates the supervisory responsibilities among the national authorities and monitors the effectiveness of supervision of banks' activities, it does not have formal status as an international organization (Ortino, 2004). However, the establishment of the Basel Committee was a significant point in the history of international banking supervision.
In 1999, there was a section that was added to the Gramm-Leach-Bilely Act, which broadened the range of activities that banking institutions in the United States could participate in, especially those institutions that elected to become financial holding companies. Although this was a significant step, financial institutions in the United States still had a narrower range than most of the other countries that were members of the G-10 group. What are some of the differences between some of the countries?
As a rule, most G-10 countries have allowed their banks to provide a full range of securities market activities (i.e. underwriting, brokering, and dealing) versus performing the transactions through a subsidiary. Also, there are a few G-10 countries that will allow a full range of insurance activities. However, the main restrictions tend not to be on the types of insurance activities. Rather, many of the restrictions tend to focus on where the activities are performed (i.e. some of the activities are required to be performed via a subsidiary). In addition, there are also restrictions on real estate activities for banks based on the range of activities, whether or not the activities are performed at a subsidiary or bank, or both. Nolle (2003) provided research that compared which G-10 country banks were allowed to own nonfinancial firms and which nonfinancial firms were allowed to own banks. The results showed that most G-10 countries were allowed to own nonfinancial firms and nonfinancial firms were allowed to own banks. However, the United States is one of the countries that have greater restrictions on having a mixture of the above-mentioned combination of activities. Japan was the only country to have a greater level of restrictiveness than the United States.
G-10 Supervisory Systems
"The United States' supervisory system has the most complex structure in the G-10, and in several key respects its banking supervisory structure puts it among the minority of G-10 countries. However, in one key respect--the funding of bank supervision as practiced by the OCC--the U.S. is similar to the majority of G-10 countries" (Nolle, 2003, par. 10). Nolle's report (2003) showed that nine of the 11 G-10 countries assign banking supervision to a single authority. The United States and Germany were the only two countries that had more than one federal level bank supervisor. In addition, the United States is one of four G-10 countries that assigns bank supervisory responsibility to the central bank. The majority of G-10 countries' bank supervisory authorities have responsibilities beyond the banking industry, either for securities firms, insurance firms, or both.
The type of supervision is important because the type of funding received could have an effect on how bank supervisors make decisions, especially if there is an opportunity for some type of political influence. For example, supervisory agencies that receive funding from the institutions they supervise may have less pressure to pursue a political agenda than supervisory agencies that are dependent on general government revenues (Nolle, 2003). Nolle's report showed that the United States tends to have a hands on approach in performing the bank supervision role. They tend to conduct on-site exams on an annual basis and have a good ratio of total supervisory organization staff to the number of banks as well as a good ratio of banking system assets to the banking system. The United States ratio of banking assets per supervisory staff member is the lowest among the G-10 countries. This finding indicates that there is a significant amount of coverage on the banking system activities on a per staff member basis. With the exception of Italy, all of the G-10 countries require an external audit as part of the bank supervision role. However, the United States does not require external auditors to report bank misconduct to the supervisory authorities, but there is a commitment to the external auditing process.
Basel Committee Contributions
The Basel Committee has made two major contributions since its inception.
The first contribution occurred in 1975 when the Committee took a lead role in making sure that countries share responsibilities when making international banking transactions. The Basel Concordate was an agreement that established the foundation for this process. The first stipulation was that the parent and host authorities shared responsibility for the supervision of the foreign banking establishments.
The second stipulation stated that the host authorities had primary responsibility for supervision of liquidity. The third stipulation indicated that the solvency of foreign branches and subsidiaries was the primary responsibility of the home authority of the parent and the host authority. The second major contribution was a standard that would assist in: Adequately measuring a bank's capital, and; establishing minimum capital standards.
Bank of International Settlements
The Bank of International Settlements is responsible for promoting monetary and financial stability. This organization meets on a bimonthly basis to discuss monetary and financial matters. The organization is composed of four major committees, and they are: The Basel Committee on Banking Supervision, The Committee on the Global Financial System, The Committee on Payment and Settlement Systems, and The Markets Committee. In addition, there are several independent organizations involved in the international cooperation in the area of financial stability, and these organizations have their secretariats at the Bank of International Settlements. These organizations are the Financial Stability Forum, the International...
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