Banking in a Changing World: Issues & Questions in the Resolution of Cross-Border Banks

Abstract

The globalization of finance has led to the development of more integrated global exchange networks among countries and deeper interrelationships between their economies. Many financial institutions and activities that once were local are now international. While business and finance are global most regulatory systems and laws are not. Many of the regulatory and legal norms that govern these networks and interrelationships have not kept pace with these innovations. There are few international rules and norms to govern the linkages between financial institutions, payments systems, and markets. National laws almost exclusively define the relationships between internationally active banks and other financial institutions. The real task of the future is to develop regulatory and legal norms that allow the benefits of increased global interaction to blossom while mitigating the more troubling consequences of global finance.

This paper focuses on the challenges faced by national authorities in responding to financial instability in a cross-border bank. The paper identifies the issues created both for home countries of large cross-border banks and for host countries for such banks. While the host countries face daunting challenges, home countries must respond as well to difficult policy questions. In the absence of a common international insolvency system for cross-border banks, national authorities must improve their understanding of the options available and improve coordination with other regulators if they are to be successful in limiting the consequences of a potential cross-border failure. Both legal changes and fresh approaches to international coordination and decision-making may be required to respond to the reality of cross-border banking.

Keywords: Banks, cross-border banks, regulation, bank insolvency, bank resolution, international law, home-host

JEL Classification: G2, G15, G18, G21, G28, E53, E58, K23, K2, F42