The systemic importance of foreign banks as banks

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The systemic importance of foreign banks As banks increase their activities across the region, their systemic importance is likely to grow. At one extreme, when a single regional bank dominates foreign lending, it becomes a “common creditor”. It can create systemic risk through two channels: it can transmit shocks from its home country to many host countries simultaneously; and the losses it incurs in one host country can lead it to cut exposures elsewhere. Even if there are several foreign creditor banks for one host country, foreign lending to the country may be concentrated among a few creditors, raising similar issues. Furthermore, a foreign bank could be systemic in a small host market even if that market is not important to that bank’s total global operations. All of these patterns create challenges for host supervisors and for home-host cooperation. Foreign bank presence in the form of branches poses particular challenges. While often exposed to similar risks, branches tend to be less costly to set up and operate than subsidiaries because in many jurisdictions they are not subject to the same capital and liquidity requirements as domestic banks and foreign bank subsidiaries (Ehlers and Wooldridge (2015)). Instead, host countries typically rely heavily on the home jurisdiction in regulating foreign bank branches. In recent years, however, there has been concern that such regulation by the home
BIS Quarterly Review, September 2015 131 jurisdiction may not adequately recognise issues of systemic risk in the host countries. The stability of the funding of branches in order to contain the risk of disruptions in domestic credit supply is one key issue in this regard. The general policy direction for regulators in the region has been to put branches on an equal footing with domestic banks, subjecting them to the local, tighter regulatory requirements. 8, 9 One example concerns the Hong Kong Monetary Authority (HKMA). In January 2014, the HKMA introduced a Stable Funding Requirement (SFR), under which both local banks (including subsidiaries of foreign-headquartered banks) and foreign bank branches whose loan growth in 2013 exceeded 20% must maintain longer-term stable funds, such as customer deposits and a capital base, to support their lending business. Regulatory authorities in the region are well aware of the need to understand and monitor the sources and channels of systemic risk and to cooperate so as to prevent the failure of a regionally active bank and manage its fallout. Supervisory colleges for regionally active banks are an important mechanism for sharing information and discussing policy options (CGFS (2014a,b)). For example, the Central Bank of Malaysia and the Monetary Authority of Singapore (MAS) host supervisory college meetings for three Malaysian and three Singaporean banking groups, respectively, involving supervisors from jurisdictions where the banks have sizeable operations. However, certain types of sensitive information are difficult to share in a multilateral college format. Bilateral relations among supervisors and

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