The Aftermath of an International Bank Insolvency

Introductory Remarks

Héctor Tinoco Jaramillo

In recent years there have been overwhelming technological developments in addition to a growing trend towards the liberalization of financial services around the world. Together, these have brought about a proliferation of multinational global banks and a rapid increase in sophisticated financial instruments which have enriched both international payment and credit mechanisms.

It is a fact that, in most cases, these institutions have contributed to the development of the financial systems in which they participate. However, this has led to a certain amount of complication in the surveillance of their activities, attributed to the special difficulties inherent in supervising the generally complex structure of these organizations. Supervision complications also arise due to the multiple types of transactions performed using modern telecommunications equipment and fund transfer systems.

Without the possibility of effectively supervising multinational banks, an environment may be created in which the likelihood of non-compliance with prudential and other applicable regulations, and hence the likelihood of wrongdoings and failures, increases with the corresponding undesirable consequences. This is in addition to the different risks which are always involved in the normal operation of any active banking institution.

There is no simple nor single solution to the problem; therefore, the financial authorities of the countries in which international banks participate have the difficult task of controlling the multiple repercussions and side effects of the insolvency of said banks. Consequently, the different aspects of such failure deserve a careful continuous analysis and should be subject to considerable discussion.

Perhaps one of the most important challenges for central banks involved in an international bank insolvency, despite its complexity and geographic diversity, is to avoid systemic effects on the financial systems or on the operation of the payment system. The foregoing can only be achieved through careful coordination among the central banks involved.

In the course of this Workshop we have heard various presentations on a number of experiences as well as some interesting points of view. These perspectives related to the role of financial authorities in crisis prevention as well as to the different instruments which may be used for crisis resolution.

It is important to note that previous experience has shown that a significant amount of cross-border information-sharing among supervisors could help address the problem. Particularly, we must consider that financing techniques and business practices will be significantly different from country to country, at least until a reasonable amount of harmonization of financial regulation is achieved.

Such sharing of information among authorities of different countries enables those involved to better understand the structure of financial transactions conducted by international banks and to detect irregular practices in their operations.

Another important matter to consider is the proper allocation of supervisory responsibility among national authorities, providing consolidated supervision either by a single home country supervisor or by several supervisors acting as a college.

In addition, to prevent international bank insolvency, significant efforts should be made to establish uniform criteria for the incorporation of foreign banks, branches, and subsidiaries, encouraging them to use the same financial, managerial, and operational standards governing domestic banks.

In other words, given that financial fraud in one country can also have disastrous consequences in another, international cooperation is essential to improve the supervision and regulation of multinational banking organizations.

Despite the efforts to prevent the insolvency of international banks, we cannot assume that such an event will not happen again. Therefore, it is important to bear in mind that, as soon as we can implement the necessary mechanisms for efficient cooperation to deal with such and eventuality, both the problems and effects might be successfully cushioned.

Then, the biggest challenge to overcome will be the creation of a comprehensive and efficient general strategy to contain systemic risk and thus prevent the failure of an international bank from affecting other financial institutions or the markets as a whole.

In this regard, we should endeavor not only to eliminate the existing legal differences in the insolvency regulations and related procedures applicable in countries which might obstruct the achievement of that purpose, but also any other inconvenient practice which could affect the prompt implementation of this strategy.

To create such a strategy, adequate channels of communication must be established among us. The holding of workshops like this one will also be extremely helpful.

Recent events taking place in the financial sectors of some countries in Asia have demonstrated that, despite the development of a country’s economy and financial system, no one is exempt from facing problems which require important legal and structural changes.

Therefore, I am sure that the experiences presented by the following speakers will be of particular interest to us all.