INTERNATIONAL BANKING REGULATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000601290001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: August 11, 2010
• Sequence Number: 1
• Publication Date: November 28, 1983
• Content Type: MEMO

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Central Intelligence Agency
MEMORANDUM FOR: Mr. Gary R. Edson
Special Assistant to the Deputy
Secretary of State
Department of State
Chief, Economics Division
Office of Global Issues
NOV
SUBJECT International Banking Regulations
1. I recently asked one of my analysts to take a look at
changes in OECD country banking supervision which may affect
lending to debtor countries. I thought you might find the
results of interest.
2. I know your schedule has been extremely busy the past
few months. It seems that Ken has been involved in a steady
stream of crises. If you get a chance, however, give me a call
so we can try to get back on track on our biweekly meetings.
Attachment:
GI M 83-10271, November 1983,
The Debt Crisis and Bank Regulatory
Policies
wl 8-3-1 D-2~ /
l d-l
1983
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DIRECTORATE OF INTELLIGENCE
MEMORANDUM FOR: Douglas P. Mulholland
Special Assistant to the
Secretary for National Security
Department of the Treasury
Chief, Economics Division
Office of Global Issues
N, V
SUBJECT International Banking Regulations
1. I have attached a copy of a study we recently completed
on changes in OECD country banking supervision which may affect
future lending to debtor countries. We have sent a copy of this
report to Kevin Coyne. I thought you might find this typescript
timely because of passage by Congress last week of measures which
tighten regulation of foreign lending by US banks.
Attachment:
GI M 83-10271, November 1983,
The Debt Crisis and Bank Regulatory
Policies
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Washington. D. C. 20505
fWv
DIRECTORATE OF INTELLIGENCE
MEMORANDUM FOR: Mr. Kevin Coyne
Special Assistant to the Deputy
Secretary of the Treasury
Department of the Treasury
FROM : 25X1
Chief, Economics Division
Office of Global Issues
SUBJECT International Banking Regulations
1. I recently asked one of my analysts to take a look at
changes in OECD country banking supervision which may affect
lending to debtor countries. I thought you might find the
results of interest.
2. I hope the material) I sent you last week was
useful. If you think any additional scenarios would be worth
running before the 1 December meeting just let me know.
Attachment:
GI M 83-10271, November 1983,
The Debt Crisis and Bank Regulatory
Policies
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SUBJECT: International Banking Regulations
OGI /ECD/T
Distribution:
Original - Gary R. Edson, State Department
3 - Douglas P. Mulholland, Treasury
1 - Kevin Coyne, Treasury Department
1 - SA/DDCI
1 - Executive Director
1 - DDI
1 - DDI/PES
1 - NIO/ECON
2 - CEA
1 - CPAS/ILS
1 - D/OGI, DD/OGI
1 - Ch/ECD
1 - Ch/ECD/IF
2 - Ch/ECD/T
1 - Ch/EURA/EI/EI
1 - Ch/OEA/J
8 - OGI/PS
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DIRECTORATE OF INTELLIGENCE
THE DEBT CRISIS AND BANK REGULATORY POLICIES
Summary
The regulatory climate faced by banks lending to debt-
troubled countries has been characterized by inconsistancy this
year. While regulatory agencies are trying to encourage
continued private capital flows to debtor LDCs, they have had to
follow their legal duty to monitor bank soundness and safeguard
investor and depositor interests. Bankers have complained loudly
about being pulled in two directions whenever regulators have
supported rescue efforts while also pointing out concerns over
exposure. Integrated regulatory strategies have been difficult
to achieve, and either inaction or halfway measures have usually
resulted. However, continued slow and cautious implementation of
additional controls is likely. In our judgment it is still too
soon to assess the effect proposed regulatory changes will have
on lending to LDCs.
This memorandum was prepared by Office of Global
Issues. Comments and Queries are welcome and should be addressed
to the Chief, Economics Division, OGI
GI M 83-10271
November 1983
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The Debt Crisis and Bank Regulatory Policies
Recent Regulatory Actions
Regulatory measures that commercial bank regulators have
undertaken at least partly in response to the 1982-83
international debt crisis fall into three areas:
* Improving the quality of information regulators
receive on worldwide activities of banks.
* Increasing bad debt reserves.
* Lowering the ratio of loans to bank capital.
Information
Banking regulators -- central banks, finance ministries, or
specialized banking supervisory agencies -- in major OECD
countries have kept an attentive eye on commercial bank exposure
while confronting the past year's LDC and East European liquidity
crises and reschedulings. To date, regulators have devoted most
of their effort to improving the flow of information they
receive. With improved information national government
regulators can more effectively monitor the exposure and
soundness of individual banks and better coordinate their own
activities with bank regulators in other countries.
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Thus far,'the major push for improved information has come
from banking supervisors working-as a committee of the Bank for
International Settlements (BIS) and from The European Community
(EC). In June the BIS Committee on Banking Regulations and
Supervisory Practices, known as the Cooke Committee,*
reformulated its 1975 international bank supervisory guidelines,
the "Basel Concordat." The committee has tried to eliminate gaps
in reporting to supervisory authorities that developed as a
result of the rapid internationalization of banking. Under the
new agreement, responsibilities of the various national banking
authorities for supervising parent banks, branches, subsidiaries,
nonbanking subsidiaries or joint ventures are defined in
detail. For example, bank holding companies, such as the
Luxembourg operation of Banco Ambrosiano, will report to banking
supervisors. for the first time.
The principle of consolidated supervision is central to the
Cooke Committee's effort: the parent's supervisory authorities,
should monitor the combined balance sheet of the parent and off-
shore operations-. Host country regulators'also have supervisory
responsibilities, particularly in monitoring liquidity. The
agreement, however, contains no guidelines on capital ratios,
reserves, or lender of last resort policies. Some leading West
European bankers have indicated that even if all Cooke Committee
guidelines are followed, there still will remain the substantial
*The Cooke Committee comprises banking supervisors from the
United States, Japan, West Germany, France, the United Kingdom,
Italy, The Netherlands, Belgium, Canada, Sweden, Switzerland, and
Luxembourg.
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problem of the comparability of various national philosophies of
The EC has drafted a directive, approved by the member
states in June, requiring credit institutions to report on a
consolidated basis -- already the rule in the United States. The
directive obliges member states to introduce within two years
national legislation requiring reporting by banks to include
results of foreign subsidiaries. The directive, if implemented,
would eliminate legal obstacles to the exchange of information on
banking operations among EC member'states. A related draft
directive, still in its early stages and not yet approved by the
EC Banking Advisory Commission, would require bank branches with
head offices outside countries in which they are located to
banking supervision.
From an individual country perspective, West Germany has
recently begun to bolster its reporting requirements. The West
German Finance Ministry recently proposed legislation that would
require banks to report consolidated balances including results
report annual accounts of the parent.
of all majority-held subsidiaries. Under a 1982 gentlemen's
agreement with regulators, about 40 West German banks already
voluntarily report loans made by their subsidiaries. Other
provisions would make it easier for West German regulators to
share information with bank supervisors in other countries.
According to Embassy reporting the proposals are expected to come
Elsewhere, the Swiss Federal Banking Commission this year
began to require reporting by banking groups on a consolidated
into force by 1 July 1985.
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basis. According to diplomatic reports, UK officials have
acknowledged that recent sovereign debt problems have stimulated
reviews within the Bank of England of adequacy of information on
bank exposure, supervisory practice, and country risk analysis..
In the private sector, commercial banks from Western Europe, 25X1
Japan, the United States, Canada, and Brazil established in
January the Institute for International Finance, to be located in
Washington, D.C. It is designed to aid sovereign risk assessment
by the member institutions by supplying them with information on
the economic condition of debtor governments and potential
borrowers. Japanese financial institutions have established a
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Bad Debt Reserves
General bad debt reserves based?on debtor performance are
required in most countries, and sometimes specific reserves are
required for individual loans or problem debtors. So far this
year two countries have altered policies in this area. In
October the Swiss Federal Banking Commission asked Swiss Banks
voluntarily to set aside bad debt reserves for problem debtor
countries amounting to 20 percent of outstanding loans. The
financial press has reported that the action follows from the
Commission's belief that a number of Swiss affiliates of foreign
banks have inadequate provisions against sovereign risk.
Managers of some of these foreign banking operations in
Switzerland have objected to the new guideline which is stricter
than those of parent countries. According to Embassy reporting,
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most major Swiss banks already have hidden reserves beyond
legally required levels and are not expected to be affected by
the move. Virtually all banks in Switzerland will probably treat
the recommendation on bad debt reserves as binding.
Embassy Tokyo reports that since March the Japanese Ministry
of Finance has encouraged banks to establish larger bad debt
reserves against overseas lending. 'Banks are permitted to place
in the new reserves between 1 and 5 percent of outstanding loans
to problem debtor countries. At present, banks may deduct from
taxable income 0.3 percent of all lending, or an amount
reflecting average. bad debts over the past three years, as a bad
debt reserve. The new reserves can be applied to debtors that
fall one month behind in payment of principal or interest or have
arranged or requested rescheduling.
According to Embassy reporting some MOF officials
favor making the new reserves tax deductible in order to place
Japanese banks on an equal footing with foreign banks which
receive favorable tax treatment for such funds. However, MOF tax
officials oppose such a move.
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Capital Ratios
Among the OECD countries, only West Germany has recently
moved to lower the ratio of loans to bank capital. Legislation
recently proposed by the West German Finance Ministry would limit
by 1988?a bank's consolidated lending to 18 times capital -- the
ratio now required for unconsolidated reporting.
Leading bankers have criticized the capital ratio proposal,
noting that current consolidated ratios can be as high as 24 to
one. They have suggested a ratio of 20 to one as less likely to
restrict domestic or international lending and have asked for a
longer transition period. According to Embassy reporting, an
official of one of the three largest West German banks said that
his bank's strategy would be to freeze loans as.a percentage of
the bank's loan portfolio and raise capital whenever the market
permits.
Embassy Bonn reports that West
German bankers identify their participation in the recent lending
package for Brazil as an undertaking they may not be able to
duplicate unless authorities avoid rigorous application of
capital ratios.
West German government officials, however, assert they do
not want banks to curtail international lending, but only wish to
improve their soundness. According to Bundesbank officials,
legislation is being sought because the government and private
bankers could not agree on terms for a voluntary regime and
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because the provisions on reporting in the draft law would
formally conform to changes in EC regulations on consolidated
reporting. They believe that a five-year transition period can
bring the foreign activities of West German banks under control
without disturbing international lending activities.
In Canada recent publicity over very large domestic loans,
such as rescheduled loans to Dome Petroleum, has led to increased
internal scrutiny of foreign loans by Canadian banks. According
to the financial press the Inspector General of Banks has
indicated that general guidelines on capital adequacy will be
issued.
Regulatory Outlook
Concerned that overreaction could threaten lending to debtor
LDCs, most OECD banking regulators have acted cautiously while
reviewing policies and improving the quality of information
available to them. Some countries -- Switzerland, West Germany,
and Japan -- have taken measured regulatory actions designed to
P'
limit exposure or guard against loss. Others, such as Britain
and France, have not altered standing policies.
As long as concerns over bank soundness prompted by the
Third World debt crisis remain, slow and cautious implementation
of additional controls is likely. Predictions by West German
bankers that controls will have serious consequences for
international lending are clear attempts to influence
legislation, but they probably also represent genuine concerns of
bankers. Despite such indications that lending to LDCs might be
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affected if the current, tentative regulatory trend continues and
accelerates, it is still too early to assess its effects on
lending.
Criticism of Proposed US Actions
Over the past year most criticism of banking law changes
affecting Third World lending was focused on major legislation
pending in the US Congress.* In July, British bankers complained
to US bank regulators that the earnings of UK banking operations
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in the United States would be seriously affected if major South
American countries are included in proposed special reserves.
*In April, US regulators announced a five point program that
included a special bad debt reserve requirement on problem
foreign loans, strengthened country risk examination, expanded
disclosure of country risk exposure, increased cooperation with
foreign bank regulators, and a rule that loan fees be charged
over the life of a loan. Subsequently, differing House and
Senate versions of these provisions were incorporated into the
IMF funding legislation. Both chambers passed bills last summer,
and on November 17 and 18 Congress approved the conference
report. Major provisions of the final version will require banks
to: (1) set up special bad debt reserves, with the amount to be
specified by regulators, whenever regulators determine that a
foreign borrower is unable to meet its loan obligations, and (2)
maintain adequate capital ratios, as determined by regulators. A
House provision restricting new lending to a problem debtor
country if a bank's public and private loans to that country
exceed its capital was dropped from the version agreed to in
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stricter regulation of foreign lending, if approved in the United
States, could spread to Western Europe and Canada. They feared
that such atrend might be sustained by increased US influence
resulting from current efforts to broaden coordination among
regulatory authorities. The London Financial Times expressed
concern that Congressional proposals threaten to curb lending to
LDCs and argued that despite mistakes made by commercial banks in
sovereign lending, judgments about credit allocation should be
left to bankers and not to politicians.
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Current Work On International Banking Supervision
A series of six monographs on international banking are
being produced by the OECD Secretariat. The Internationalization
of Banking has been published. A second monograph, Prudential'
Supervision, will be completed around the end of 1983 or
beginning of 1984. Other monographs will deal with electronic
funds transfers, asset and liability management, banking and
monetary policy, and banking competition. The OECD monograph
series is an attempt to describe major changes that have occurred
in the banking and financial intermediary environment in the. OECD
countries over the last 15 to 20 years. These papers are not
designed to be policy documents; they will only be descriptive.
They will include particular emphasis on the development and
workings of multilateral fora to deal with problems of
multinational bank supervision.
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A partial chapter breakdown of the prudential supervision
monograph is available (there will probably be additional
chapters):
Chapters 1-3 Purposes of bank supervision
Chapter 2 National policies on authorizing
international activities of banks,
including foreign acquisitions
Chapter 3 Supervisory policies with respect
to country-risk limits,
monitoring, concentration,
accounting, disclosure, and loan
loss reserves.
NSF Program
The multi-year National Science Foundation program of
research in international economics is sponsoring research on
international finance by the Brookings Institution. Under direct
NSF funding and through the Brookings grant, Jack M. Guttentag
and Richard J. Herring of Wharton have produced several papers,
either already published or in various stages of revision: The
Lender of Last Resort Function in an Internatinal Context; What
Happens When Countries Cannot Repay Their Bank Loans? The
Renegotiation Process; Credit Rationing and Financial Disorder;
Uncertainty and Insolvency Exposure by International Banks;
Disclosure Policy and International Banking; and The Current
Crisis in International Banking. The last two address some
aspects of the prudential supervision issue. In view of current
interest in the issue, Guttentag and Herring may extend their
research on disclosure issues.
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They have also started work this year under the NSF grant
on three new projects on prudential supervision and regulation of
international banking:
(a) A paper on prudential supervision of, and
the provision of emergency liquidity assistance to, international
banks. A first draft will be available fall 1983. This paper
will look at why the growth of international banking has created
special difficulties in supervising the soundness of banks and in
providing liquidity assistance in emergencies, current ideas for
dealing with bank soundness through international cooperation
(in particular through the Cooke Committee), existing
arrangements for lender of last resort assistance, problems posed
for regulators by methods used to consolidate accounts of banks
and their affiliates, regulatory weaknesses caused by country-by-
country variation in the scope and nature of regulation of
liquidity positions, and the relationship between regulation of
liquidity and the regulation of interest-rate risk exposure.
(b) A paper addressing the factors underlying
the declining capital positions of banks heavily engaged in
international banking as well as the supervisory and regulatory
policies aimed at influencing these positions. A draft should he
finished by spring 1984. Among the topics this paper will
probably consider are the US proposal for special reserves tied
to lending to problem debtors, problems in relating capital
requirements to country exposures, formal (quantitative) versus
informal (qualitative) capital requirements, how to define
capital for regulatory purposes, effects of the location of
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capital holdings of international banks with foreign'affiliates
on prudential regulation, problems of coordinating bank
regulation between governments, and how to consolidate accounts
of banks and their affiliates for regulatory purposes.
(c) A paper on the interbank market and the
management of the liquidity position's of international banks.
The first written report on this project is scheduled to be
available spring 1984.
The NSF program also includes projects by other scholars
that address prudential supervision:
(a) Richard Dale, a Brookings visiting scholar,
and Richard Mattione of the Brookings staff have produced a
study, Managing Global Debt, which was published in September.
This paper surveys five broad categories of policy actions that
have been proposed to deal with problems that banks are
experiencing with LDC and East European borrowers. One of these
five categories is regulatory constraints on banks.
(b) A book-length study, The Internationalization
of Banking and Its Implications for National Regulatory Policies,
by Ralph Bryant, a Brookings Senior Fellow, will probably be
available in draft during the first half of 1984. One of the
objectives of the project is to analyze the differences between
the supervisory and regulatory environments in the United States
and in other major countries and the trends toward elimination of
those differences. Bryant intends to examine Cooke Committee
activities, as well as prudential -- and what he calls
"nonprudential" -- aspects of bank regulation and supervision.
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