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From Banking and Finance Law Daily, November 6, 2015

Tarullo promotes shared responsibility for international banking regulation

Colleen M. Svelnis, J.D.

Federal Reserve Board Governor Daniel K. Tarullo emphasized the importance of financial stability in the shared responsibility for regulation of international banks at an international banking conference in Chicago. The 18th Annual International Banking Conference, “The Future of Large and Internationally Active Banks,” was sponsored by the Federal Reserve Bank of Chicago and the World Bank. Tarullo advocated for a strong set of international prudential standards and good institutional relationships among regulators but said that growth or innovations in banking may create new risks that prompt regulatory change.

Who and what. Tarullo addressed the issues of who does the regulation and what regulation is appropriate. According to Tarullo, “in the absence of either a global regulator or completely insular national banking systems, we must continue to work toward a system of shared responsibilities to assure both home and host regulators that internationally active banks are subject to adequate oversight and controls.” Tarullo discussed:

  • benefits and risks associated with international banking;
  • different models for allocating responsibility for the oversight of international banks;
  • shortcomings of the system for regulating internationally active banks that prevailed before the financial crisis and developments in the intervening years;
  • challenges remaining and suggestions for progress.

Risks and benefits. Tarullo referenced complaints that the emphasis on financial stability will result in the “balkanization” of international banking. He said that during the financial crisis, some internationally active banks posed special problems for both home and host countries. Tarullo cited the following potential advantages to cross-border banking:

  • facilitating productive capital flows;
  • diversifying risks associated with growth in host countries;
  • diversifying the earnings and thus the stability of the global bank;
  • offering counter-cyclical lending through support from the parent when host country economic conditions constrain domestic banking operations;
  • enhancing efficiency in financial intermediation in host countries, providing specialized financial services; and
  • providing price or product competition for banking services in host countries.

Tarullo noted that the risks associated with foreign banking are distinct from risks associated with banking more generally and “tend to be related to the parent bank’s capacity to support the larger organization.” He also pointed out that the risks vary considerably among host countries. Tarullo enumerated several risks. He said that reversals in the home market or other significant foreign operations may reduce the ability of the parent to support its foreign affiliates with needed capital and liquidity. Additionally, according to Tarullo, there is the risk that the foreign bank will fail and that the home country will lack the resources to ensure either that it is recapitalized and continues to function or that it fails in an orderly fashion. He concluded that host country officials could be forced to choose between supporting a foreign bank or allowing it to fail in a disorderly fashion, with potentially serious effects.

After the financial crisis. The profound shift in political and policy environments as a result of the financial crisis has resulted in considerable strengthening of minimum international standards for internationally active banks, at both national and international levels, according to Tarullo, who also asserted that the Fed supported all these measures.

Tarullo stated that a good approach to compliance “would be one that simultaneously provides regulators with a way to work with one another and to gain deeper insight into how their counterparts in other jurisdictions are applying prudential standards.”

MainStory: TopStory BankingOperations CapitalBaselAccords FederalReserveSystem FinancialStability PrudentialRegulation

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