Conflicts between Home & Host Country Prudential Supervisors

Abstract

Potential conflicts between home and host supervisors are legion and may impose heavy compliance costs on internationally active banks, create competitive distortions and jeopardize financial stability. Nonetheless, in comparison to efforts to achieve international cooperation in other economic spheres such as trade, exchange rates and macroeconomic policy, efforts to achieve international cooperation among bank supervisors are relatively recent. They sprang from the unanticipated consequences of applying traditional domestic closure practices to a bank that had substantial cross-border activities. When the West German authorities closed Bankhaus Herstatt at 4:00 pm CET on June 26, 1974, they followed normal domestic procedures and waited until the end of the business day. But this was mid morning in New York, where the dollar leg of $625 million of Herstatt’s foreign exchange contracts remained to be settled. The closure of Herstatt thus resulted in abrogation of these foreign exchange contracts in New York and caused a prolonged disruption in foreign exchange trading and dislocations in the broader Eurodollar market as well. In reaction to the Herstatt crisis, the central bank governors of the Group of Ten formed what later became known as the Basel Committee on Baking Supervision (“Basel Committee”)