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On the Problems of Home Country Control

  • Mayes, David

    ()

    (Bank of Finland)

  • Vesala, Jukka

    ()

    (Bank of Finland/Financial Supervision)

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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/DP_20_1998.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/1998.

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Length: 32 pages
Date of creation: 23 Sep 1998
Date of revision:
Handle: RePEc:hhs:bofrdp:1998_020
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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  1. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  2. Milbourn, Todd T. & Boot, Arnoud W. A. & Thakor, Anjan V., 1999. "Megamergers and expanded scope: Theories of bank size and activity diversity," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 195-214, February.
  3. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
  4. Robert C. Merton, 1995. "Financial Innovation and the Management and Regulation of Financial Institutions," NBER Working Papers 5096, National Bureau of Economic Research, Inc.
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