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 corporations 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 country 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 affiliates 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 countries, 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 stockholders 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 procedures 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 regulator 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 regulation in the future is an open question.