Studies On The Mechanism Of International Cooperation Concerning Cross-border Banking Supervision

The cross-border banks have been developing rapidly since the financial integration took place. However, the trade-off associated with the development of cross-border banking is straightforward: financial system around the world become more and more interconnected, which in turn expands the potential for negative spillover effects in times of crises. Thereby, effective supervision of cross-border banks is crucial to the security of the international finance. Since the supervision is based on consolidated basis, it requires the cooperation between home country and host countries. However, the global financial crisis has uncovered a number of weaknesses in the cooperation of banking supervision which need to be resolved.Since then, international bodies such as the Financial Stability Board(FSB) and the Basel Committee on Banking Supervision(the Basel Committee) have responded in a concerted effort and publicly promoted the use of supervisory colleges to intensify cross-border banking supervision. This article explores whether supervisory colleges are the ultimate solution to the cooperation of banking supervision and if not, what are the key elements to solve this problem.Chapter one analyzes the importance of the cooperation of cross-border banking supervision and lists some banking failures and financial crisis that fostered the development of cooperation. The 2008 financial crisis reflected that there remained some flaws in the cooperation mechanism of cross-border banking supervision. And one of the solution that people came up with is the formation of supervisory colleges. This part provides basic background concerning the study.Chapter two describes in detail the cooperation mechanism of cross-border banking supervision and analyzes the obstacles that the mechanism induced. The cooperation mechanism includes two parts, which are cooperation architecture and substantive arrangements.The current cooperation architecture consists broadly of three different types of frameworks. These frameworks range from international organizations to regional cooperation schemes and to bilateral arrangements between national regulators. In terms of cooperation architecture, supervisors from different countries cooperate on voluntary basis. Because most international supervision rules are soft law and there is no formal international supervision organization that can sanction national authority for not conducting cooperation.Meanwhile, judging from the substantive arrangement, there are two fundamental reasons explaining the lack of effective cooperation. First is the implementation of the current supervisory arrangements for cross-border supervision favors home country supervisors by giving them a leading role. In some particular scenarios, host countries of systemically relevant foreign institutions have strong incentives to participate in the supervision of the banking groups. But the supervisory arrangement does not utilize these incentives. Second is the focus of the current supervisory arrangements on ongoing supervision and the lack of an effective mechanism to resolve banks that are active in multiple jurisdiction. The national authorities’ ultimate incentive of supervising banking groups derives from the loss that they may suffer in the event of supervisory failures. As long as the resolution of cross-border banks remains at the national level, it is unlikely that supervision will be focused on achieving globally efficient outcomes.Chapter three describes and analyzes the supervisory colleges, including its development, characteristics, structures and functions. Supervisory colleges help to expand the role that key host countries play in supervising cross-border banks. Nevertheless, the formation of supervisory colleges still leaves national authorities to cooperate on voluntary basis and the resolution of cross-border at the national level. Therefore, supervisory colleges are not the best solution to the cooperation of cross-border banking supervision.Chapter four proposed some suggestions to improve cooperation of banking supervision fundamentally. They include the promotion of supervisory college to enhance information exchange and cooperation, the formation of resolution mechanism to solve the interest conflicts, and the establishment of the oversight and enforcement mechanism in case effective supervisory cooperation does not take place. In doing so, this article makes some specific policy suggestions.How to establish an integral cross-border banking resolution plan is beyond the purpose of this article. So the discussion of resolution plan in this part is just from the perspective of improving international supervisory cooperation. The basic resolution plan can be based on institution-specific cross-border cooperation agreements. Home and key host supervisory authorities and resolution authorities can form Crisis Management Groups to enhance preparedness for and to facilitate the management and the resolution of cross-border banks. In order to improve the supervisory cooperation, the resolution plan should at least include two element, which are the agreements on shared resolution powers and resolution funding.In order to make cooperation actually occur, it is important to make sure that the current soft law to be more binding. It requires two elements. First is when enacting international supervisory rules, it is vital to taking most countries’ interests into account so that these rules can be generally respected. Second is to overseeing national authorities to conduct supervisory cooperation, which requires a formal international supervisory organization. This article explores the path to its establishment and suggests its characteristics.Chapter five described the practices of cross-border banking supervision involving China. This part also makes some strategies and suggestions to deal with cooperation of banking supervision concerning China.