Supervisory Colleges: The Global Financial Crisis and Improving International Supervisory Coordination

Abstract

The current financial crisis has caused many governments and international bodies to reconsider the tools governments have used to supervise financial institutions, particularly those systemically important institutions with cross-border operations. This article describes and analyzes one of those tools – the increased use of supervisory colleges in regulating international banks. The article begins with a brief review of the use of supervisory colleges in the 1980s and 1990s and particularly the failure of supervisors to cooperate in detecting the massive fraud committed by managers of BCCI resulting in the one of the largest international bank failures of the 20th century. The article then analyzes and describes in detail the use of colleges in the European Union. The development of EU law and EU-wide agencies is discussed, particularly the Lamfalussy committees, the recommendations of the Larosiere report and the financial services legislation proposed by the European Commission creating three European supervisory authorities. The article also discusses the standards issued by the Basel Committee on Banking Supervision regarding the operations of supervisory colleges and the more recent emphasis of the newly empowered G-20 on the use of colleges as a tool to both improve supervisory cooperation and improve surveillance of individual financial institutions. Finally, the article highlights the limitations of supervisory colleges as decision-making bodies. The author argues for the need of an international resolution regime for financial institutions that would buttress the use of colleges of supervisors as a micro-prudential supervisory tool. Until such a regime consisting of harmonized substantive law is in place, the benefit of supervisory colleges will generally be limited to the improved exchange of micro-prudential information.

Keywords: colleges of supervisors, European Union, G-20, banking, supervisory coordination

JEL Classification: E58, G21