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

The Basel Committee has been active in the area of cross-border banking supervision since its establishment now more than 30 years ago. Despite its longstanding efforts to promote better cooperation among prudential banking supervisors, the crisis has confirmed that individual supervisors ignore the impact of their decisions on financial stability in other jurisdictions. It has also highlighted the systemic risks host supervisors whose financial systems are dominated by foreign banks face. Many of these risks originate from the numerous incentive distortions between home and host supervisors. International bodies such as the G20, the Financial Stability Board and the Basel Committee have responded in a concerted effort and publicly promoted better cooperation, particularly through the use of supervisory colleges and the establishment of cross-border crisis management groups. However, improving supervisory cooperation alone is not sufficient. What is needed is a rigorous analysis to ensure the right incentives for home and host supervisors are in place at every stage of the supervision and resolution process. For this purpose, it is essential that policymakers integrate and harmonize the current debates on crisis management, resolution policy and good supervisory practice for cross-border banking supervision.