Thorsten Beck Regulatory cooperation in cross-border banking During - - PowerPoint PPT Presentation

Thorsten Beck

REG EGULA ULATOR ORY Y COO OOPERA PERATI TION ON ON ON CROSS OSS-BORDER BORDER BA BANK NKING ING – PR PROG OGRESS RESS AND ND CHALLENGES LLENGES

Regulatory cooperation in cross-border banking

 During 2008 crisis: asymmetry between monetary policy and regulatory

authorities

 Coordination in market interventions  Little if any coordination on bank resolution  Better prepared? Biased incentives!

 Several reasons for this failure

 Lack of national bank resolution regimes  Different regulatory and legal framework undermined cooperation options

 MoUs and colleges of supervisors did not work

 Misalignment of incentives!

This presentation

 Where we came from

 High increase in cross-border banking  Pre-crisis regulatory cooperation tools have proven insufficient

 What we learned from the crisis

 Focus on resolution required  Trade-off between externalities and heterogeneity

 What we have changed after the crisis

 Lots of reforms on national and international level  Tailored approaches

 Where we have to go and what we have to learn

Wher ere e we c e came e from

Increase in cross-border banking over time

Source: Claessens and van Horen (2015)

But face of cross-border banking has changed

Source: Claessens and van Horen (2015)

Presence of European banks…

…is more and more dwarfed by intra- African connections

Desirable Cross-Border Banking

A “healthy” amount of cross-border banking is likely to be beneficial

 Diversification benefits for domestic banks and domestic borrowers  Effect on efficiency and inclusion highly context-specific  But: higher volatility of flows  But: contagion costs

Traditional instruments of cross-border regulatory cooperation



Consolidated supervision: supervision of banking, financial or mixed groups that include at least one bank at the group level, rather than supervision of just the different group members.

 requires a minimum degree of cooperation between supervisors of home and host countries



Memoranda of Understanding (MoU): legally non-binding declarations of intent to cooperate on certain issues.

 Only exchange of hard information can be mandated  value of Memoranda of Understanding rises and falls with the share price of the bank involved



Colleges of supervisors: “multilateral working groups of relevant supervisors … for the collective purpose of enhancing effective consolidated supervision of an international banking group on an

• ngoing basis” (BIS, 2010)

 as strong as their weakest link in terms of supervisory quality  primarily represent the home country supervisor’s interests  Challenge of committee decisions



Pre-crisis arrangements for cross- border cooperation were focused on sunny-day cooperation

What t we le e learne ned fr d from th the c e cris isis is

Focus on resolution needed

 Failure of cross-border bank imposes costs on foreign stakeholders that are not taken

into account by home country supervisor (Beck, Todorov and Wagner, 2013)

 Contagion effects through common asset exposures, fire sale externalities, informational

contagion, interbank exposures etc.

 Does not depend on direct cross-border engagements by banks and – on bank-level – not

even on direct exposures to international markets

 More prominently as banks move towards market finance

 Regulatory arbitrage

 Move to jurisdictions with lighter regulation  Regulatory run in case of trouble

 Within-in monetary union: additional externalities

 Close link between monetary and financial stability  Lack of exchange rate tool exacerbates impact of asymmetric shock  Common lender of last resort leads to tragedy of commons problem

Biased supervisory incentives to intervene in cross-border banks

CDS spreads of large (mostly cross-border) banks three days before intervention during 2008/9 crisis; Source: Beck, Todorov and Wagner (2012)

50 100 150 200 250 300 350 400 450 500 Deposit Ownership Low foreign share High foreign share

…but one size does not fit all

 Countries differ in their legal systems (and culture). This makes it hard

to specify a common set of rules and standards, forcing cumbersome adaptation of general principles to local circumstances.

 Differences in preferences. Countries may differ in how they view the

role of the government in the economy (one consequence being differences in state ownership), focus on fiscal independence or with respect to their risk tolerance.

 Countries differ in their dependence on banks and their market

structures in general. This influences the ease with which banks can be resolved.

Wh What at we ha e have e ch chan anged ed af after er th the c e cris isis is

A lot has happened…

 Resolution frameworks strengthened on national levels  BRRD setting minimum standards (including MREL)  Cooperation on SIFIs, TLAC…  Closer cooperation on regional level (e.g. Nordic countries)  Possible move from Multiple Points of Entry (MPE) to Single Point of Entry (SPE)

resolutions

 …  Banking union  Is it enough….?

Externalities Heterogeneity Joint regulatory and supervisory authority Strong ex-ante agreements on resolution and burden- sharing Asymmetric home-host country interests: stand- alone subsidiaries Supervisory colleges, MoUs Broader cooperation among stakeholders; regulatory convergence Closer cooperation, especially on G-SIFIs, regulatory convergence

Lots of variation across countries

Need for cross-border bank regulation varies across regions/country pairs



Low externalities, high heterogeneity: Memorandum of Understanding, Colleges of Supervisors

 India,…. Low share of cross-border banking, “closed” financial systems



Low externalities, low heterogeneity: move towards extended versions of MoUs and colleges

 East Africa: joint historic background



High externalities, high heterogeneity

 US/Europe/Japan – Europe/UK  Focus on G-SIFIs, coordination on market support



High externalities, asymmetric interests

 Stand-alone subsidiaries  Latin America, Sub-Saharan Africa vis-a-vis European/US banks



High externalities, low heterogeneity

 move towards closer cooperation: extended versions of MoUs and colleges; ex-ante burden-sharing

agreements

 Nordic-Baltic



Banking union

Where here we e ha have e to go go an and what hat we e ha have e to le lear arn n

Looking forward



Supervisors both in home and host country role



Need for dynamic approach



As cross-border bank population changes and regions integrate



Example: East Africa



Coordination across heterogeneous country groups



Vienna Initiative



African host countries of European banks



Banking union in Eurozone incomplete



Cooperation on macro-prudential regulation



… and all of this is a deeply political procress!



Research agenda:



Feedback loop supervisory architecture and bank behavior



Focus on different modes of cooperation



Need more data, more empirical research

Concluding remarks

Let’s not forget:

 Financial stability not a stand-alone goal  We want thriving and efficient financial markets!

Thorsten Beck www.thorstenbeck.com

Thank you