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Remarks by John P. LaWare Member, Board of Governors of the Federal Reserve System to the World Bank/Federal Reserve Seminar for Senior Bank Supervisors August 3, 1992 All of you participants have come a long distance and taken time from your own important functions to discuss current initiatives regarding supervision. You all currently hold executive positions in bank supervision and regulation and it is especially rewarding that you would take time to meet with your fellow supervisors. The staff has prepared a thoughtful program designed to encourage exchanges of information that are so important in building experience to handle today's problems. The Federal Reserve encourages these interchanges and has sponsored, in conjunction with the World Bank, seminars for foreign supervisors for a number of years. This is the first graduate seminar bringing together alumni of previous seminars for senior bank supervisors and in that regard it is a pleasure to welcome you back. This program today will review the progress, or perhaps lack of progress, made in bank supervision, prudential regulation, and bank restructuring. Undoubtedly, the complexion of bank supervision is changing. It was not that long ago supervisors in many of the countries 2 represented here today needed only to worry about what was happening in their own market. But the world is changing. Fast- paced developments can affect everyone's market almost simultaneously. One need only look at the rapid pace of growth in off-balance-sheet activities and the irreversible linkages between banks in this regard and in other funding areas to conclude that problems in one market will affect a number of markets simultaneously. In that context, we will, no doubt, need to rely on the framework of bank supervision in all the countries to which our banks are exposed and especially so in those countries which participate actively in our markets through branches and agencies. Therefore, it is important to all of us to work together to strengthen supervision globally. It is very important in the context of global supervision to ensure that all banks operating internationally are subject to consolidated supervision. The Basle Committee on Banking Supervision, which has had a few different names over the years, recognized this principle in 1974 when a document that is now known as the Concordat was issued. The Concordat articulated the notion that no bank operating internationally should escape supervision. There is, of course, a live example of what can happen when this concept is abridged — BCCI. There will be discussion of the lessons from BCCI later in today's program. The Basle Committee, in looking at the aftermath of BCCI, issued a report last month which set out proposed minimum standards for the supervision of international banking groups and 3 their cross-border establishments. In this respect, the Basle Committee concluded that the principles contained in the Concordat are equally valid today, but greater effort needs to be made to ensure that the principles are applied in practice. The minimum standards, while permitting flexibility as to individual legal and structural circumstances, reinforce the notion that no international bank will be able to operate in the future without being subject to effective consolidated supervision. Mr. Corrigan, the Chairman of the Basle Committee, is scheduled to address this group on Friday after lunch and I am sure he will go into greater detail on this and other aspects of the Committee's work. The United States has embodied the principle of consolidated supervision into law through the passage of the Foreign Bank Supervision Enhancement Act last December. In judging the fitness of a bank to operate in the U.S. market, the Federal Reserve must conclude that the foreign bank is subject to effective consolidated supervision. This is no easy task as the techniques of bank supervision vary greatly among countries. But, I believe that most supervisory structures provide for at least some of the elements of consolidated supervision. Other initiatives that I see being actively undertaken in the area of bank supervision are the strengthening of oversight over the full range of off-balance-sheet activities and devising a system to measure the exposure of banks to market risk leading to folding this measurement into the Basle risk-based capital framework. 4 But, just in case you think our world begins and ends in strengthening the supervisory process over banks and building relationships among bank supervisors, let me suggest that it is becoming increasingly important to build a framework of supervision over financial intermediaries that includes our colleagues from the securities and insurance side of the business. These efforts have already begun in Basle. At this point, I will stop and let you begin your program. I think the staff has done a fine job in preparing this program and much benefit should be gained in the exchanges of information that will take place this week. #
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