Research Discussion Papers, Bank of Finland
On the Problems of Home Country Control
() and Jukka Vesala
Abstract: In the European Economic Area the home country supervises
the activities of its banks, wherever they are operating via branches or
across borders, while the host country handles the stability of its
financial system and problems stemming from failure or distress. We address
two main problems related to the conduct and co-ordination of these two
responsibilities. First, the introduction of the euro and the removal of
other regulatory barriers is likely to lead to increasing
internationalization of banking. In particular in smaller countries, large
portions of the banking sector may be supervised by other 'home'
authorities. This will make difficult assessing what is happening in the
market as a whole and warning about emerging systemic problems. Home
supervisors will find it difficult to cover the widening range of countries
in which their banks operate. Increasing the information exchanged and
co-operation among supervisors would be helpful, but emphasizing public
disclosure by banks to enable market discipline to supplement the work of
the authorities would help overcome the problem of information
considerably, in addition to the favourable impact on incentives to banks
for prudent risk management. Second, the interests of home and host
supervisors in a crisis may differ and need to be co-ordinated. What is
important to the host authority in a small country may be inconsequential
to the home supervisor of a multinational bank in a large country.
Co-ordination at European level might help.
Keywords: banking supervision; disclosure; crisis management; (follow links to similar papers)
32 pages, September 23, 1998
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