Financial Markets and Institutions (2-downloads)

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Part 6 The Financial Institutions Industry

G L O B A L

International Financial Regulation

Because asymmetric information problems in the

banking industry are a fact of life throughout the

world, financial regulation in other countries is similar

to that in the United States. Financial institutions are

chartered and supervised by government regulators,

just as they are in the United States. Disclosure

requirements for financial institutions and corpora-

tions issuing securities are similar in other developed

countries. Deposit insurance is also a feature of the

regulatory systems in most other countries, although

its coverage is often smaller than in the United States

and is intentionally not advertised. We have also

seen that capital requirements are in the process of

being standardized across countries with agreements

like the Basel Accord.

Particular problems in financial regulation occur

when financial institutions operate in many countries

and thus can readily shift their business from one coun-

try to another. Financial regulators closely examine the

domestic operations of financial institutions in their

country, but they often do not have the knowledge or

ability to keep a close watch on operations in other

countries, either by domestic institutions’ foreign affili-

ates or by foreign institutions with domestic branches.

In addition, when a financial institution operates in

many countries, it is not always clear which national

regulatory authority should have primary responsibility

for keeping the institution from engaging in overly

risky activities.

The difficulties inherent in international financial

regulation were highlighted by the collapse of the

Bank of Credit and Commerce International (BCCI).

BCCI, which was operating in more than 70 coun-

tries, including the United States and the United

Kingdom, was supervised by Luxembourg, a tiny

country unlikely to be up to the task. When massive

fraud was discovered, the Bank of England closed

BCCI down, but not before depositors and stockhold-

ers were exposed to huge losses. Cooperation among

regulators in different countries and standardization of

regulatory requirements provide potential solutions to

the problems of international financial regulation. The

world has been moving in this direction through

agreements like the Basel Accord and oversight pro-

cedures announced by the Basel Committee in July

1992, which require a bank’s worldwide operations

to be under the scrutiny of a single home-country reg-

ulator with enhanced powers to acquire information

on the bank’s activities. Also, the Basel Committee

ruled that regulators in other countries can restrict the

operations of a foreign bank if they feel that it lacks

effective oversight. Whether agreements of this type

will solve the problem of international financial regula-

tion in the future is an open question.

taking. In addition, regulated firms may lobby politicians to lean on regulators and

supervisors to go easy on them. For all these reasons, there is no guarantee that

regulators and supervisors will be successful in promoting a healthy financial sys-

tem. These same problems bedevil financial regulators in other countries besides

the United States, as the Global box, “International Financial Regulation,” 

indicates. Indeed, as we will see, financial regulation and supervision have not

always worked well, leading to banking crises in the United States and through-

out the world.

Because so many laws regulating the financial system have been passed in the

United States, it is hard to keep track of them all. As a study aid, Table 18.1 lists

the major financial legislation since the beginning of the 20th century and its

key provisions.

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Chapter 18 Financial Regulation