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Cross border banking supervision : incentive conflicts in supervisory information sharing between home and host supervisors

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  • D'Hulster, Katia
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    Abstract

    The global financial crisis has uncovered a number of weaknesses in the supervision and regulation of cross border banks. One such weakness was the lack of effective cooperation among banking supervisors. Since then, international bodies, such as the G-20, the Financial Stability Board and the Basel Committee have actively promoted the use of supervisory colleges. The objective of this paper is to explore the obstacles to effective cross border supervisory information sharing. More specifically, a schematic presentation illustrating the misalignments in incentives for information sharing between home and host supervisors under the current supervisory task-sharing anchored in the Basel Concordat is developed. This paper finds that in the absence of an ex ante agreed upon resolution and burden-sharing mechanism and deteriorating health of the bank, incentive conflicts escalate and supervisory cooperation breaks down. The promotion of good practices for cooperation in supervisory colleges is thus not sufficient to address the existing incentive conflicts. What is needed is a rigorous analysis and review of the supervisory task-sharing framework, so that the right incentives are secured during all stages of the supervisory process. For this purpose, it is essential that policy makers integrate and harmonize the current debates on crisis management, resolution policy and good supervisory practices for cross border banking supervision.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5871.

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    Date of creation: 01 Nov 2011
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    Handle: RePEc:wbk:wbrwps:5871

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    Keywords: Banks&Banking Reform; Emerging Markets; Labor Policies; Financial Intermediation; Debt Markets;

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    1. Sander Osterloo & Dirk Schoenmaker, 2004. "Financial Supervision in an Integrating Europe: Measuring Cross-Border Externalities," FMG Special Papers, Financial Markets Group sp156, Financial Markets Group.
    2. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," Microeconomics.ca working papers, Vancouver School of Economics celik-04-09-13-05-42-19, Vancouver School of Economics, revised 06 Aug 2008.
    3. Schüler, Martin, 2003. "Incentive Problems in Banking Supervision: The European Case," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 03-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
    5. Michael Taylor & Marc Quintyn & Eva H. G. Hüpkes, 2005. "The Accountability of Financial Sector Supervisors," IMF Working Papers, International Monetary Fund 05/51, International Monetary Fund.
    6. Holthausen, Cornelia & Rønde, Thomas, 2005. "Cooperation in International Banking Supervision," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4990, C.E.P.R. Discussion Papers.
    7. Yulia Makarova & Anna Ilyina & Christian Schmieder & Eugenio Cerutti, 2010. "Bankers without Borders? Implications of Ring-Fencing for European Cross-Border Banks," IMF Working Papers, International Monetary Fund 10/247, International Monetary Fund.
    8. Robert Marquez & Giovanni Dell'Ariccia, 2001. "Competition Among Regulators," IMF Working Papers, International Monetary Fund 01/73, International Monetary Fund.
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