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1:00 P.M. E.D.T.


Remarks of

Philip E. Coldwell

Member, Board of Governors of the Federal Reserve System

before the

Caribbean Basin Conference
at the
Federal Reserve Bank of Atlanta

Atlanta, Georgia
August 3, .1978


Central banks and other government banking regulatory
agencies have a variety of responsibilities.

First and foremost,

central banks are charged with the determination of monetary policy.
In addition, many central banks in the world have been given the
job of supervising commercial bank behavior and serving as lenderof-last-resort to their depository institutions.

There are differ­

ences in responsibility and authority in the supervision of bank
operations between the central banks of the primary industrial
countries of the world.

In the United States the Federal Reserve

System as a central bank has some regulatory, supervisory and
examination authority over the state-chartered member banks of the

It also has prime responsibility for bank holding companies

and their nonbank affiliates, and regulatory rule-writing responsi­
bilities in a number of areas.

In contrast, the Bank of Canada

does not have supervisory responsibilities.

Instead, such

responsibilities are assigned to a superintendent or commissioner
of banking.

This latter approach is often found in many Latin American

All basic responsibilities of central banks are interrelated.
Monetary policy, of course, is not developed nor implemented in a



It must work through the credit-granting institutions of the
Only by assuring itself that such institutions are soundly

capitalized and well managed can the central bank be certain that its
monetary policies are being implemented in the most effective and
efficient manner.

Of course it is not necessary that the central bank

do the direct examination and supervision of banks, providing that
those who do, not only fully report the results of their examinations
and supervision but also consult with the central bank so that the
actiors being taken in the field of examination, supervision, and
enforcement are compatible with the credit needs of the nation*
One way or another it is important that the central bank be thoroughly
familiar with the problems of examination and supervision.
Also of considerable importance to the central bank are the regula­
tory relationships.

It would be difficult for a central bank to accept regula­

tory actions of another agency if these were created and implemented without
taking account of the central bank's need for information, requirements
for reserves, control over deposits, and utilization of the discount

Each nation has determined its own pattern for handling

regulatory, supervisory and examination functions within its special
legal, economic and institutional framework.

Thus it is apparent

that the job can be done by either a single or multiple agency approach.
However, when commercial banks begin to cross national boundaries
differences in approach become more important.

Thus I welcome the


opportunity to participate in this meeting and offer some thoughts
on the international aspects of bank supervision and regulation.
There has been an increased emphasis on international
aspects of commercial bank supervision in recent years reflecting
this rapid

expansion in international banking.

In the United States,

for example, foreign-owned banks which in 1972 accounted for only
$6 billion in deposits now in 1978 account for $27 billion or
roughly 3 percent of the total deposits of the nation.

We are

seeing many more new agencies, subsidiaries and branches of foreign
banks than in prior years.

Thus, we welcome the increased emphasis on

cooperation among central banks in the supervisory area.


years ago the central banks of the major industrial nations began
sending representatives to the Bank for International Settlement
for periodic discussions of these issues.

This meeting will emphasize

the growing importance of international banking in the Caribbean area
and will focus upon the needs for cooperative efforts on the part of
the central banks of the Latin American and North American countries
or their superintendents of banking in the regulatory area.
There have been a number of differences among authorities
around the world in the area of supervisory policy.

One issue is to

what extent those authorities should provide written guidelines to the
commercial banks and to what extent such supervision might take the
form of individual consultations.

The most obvious example of these

alternatives is reflected in the contrasting approaches of the central-


banks of the United States and the United Kingdom.

The Bank of England

largely adopted a policy of informal consultâtions,whereas the United
States has opted for written judgments

and regulations,

Some of this

difference may merely reflect the structure of the banking industry
and the diversity of such banking units.

In the United States there

are almost 15,000 banks whereas in Great Britain there are a limited
number of very large banks, but with many "near” banks.

A recent

"white paper1 has suggested a more formal regulatory approach in the U.K.
Another policy issue concerns how much one should rely upon
the regulatory or enforcement mechanisms of government as opposed to
the market disciplines of a competitive environment.
central bank philosophies differ on this point.

Governmental and

In the United States

there has been growing reliance upon the competitive disciplines of
the marketplace to ensure equal access to credit at the best terms
and conditions.

Both methods of control would appear to be moving in

tandem to assure ourselves of a safe and sound banking system, but
one which is responsive to the needs of the nation to provide credit
for sustainable noninflationary growth.
Still another point of difference would seem to be the
question of credit allocation.

The United States central bank has

never sought to allocate credit or to substitute its judgment for the
judgment of the marketplace on which sectors of the economy should
receive credit.

I recognize that in such a diverse and well-organized

industrial society as in the United States, such a philosophy is


perhaps more effective and even more efficient than in a developing
country without the strength of broad industrial components or a
widely diverse economic structure.

Commercial bank supervision in

the United States relies heavily upon the adequacy of management
systems and controls and the adequacy of credit information.


are giving increasing emphasis to information systems which will
enable regulatory agencies to exercise oversight to assure the
nation of the safety and soundness of the banks as opposed to
allocating credit to particular areas.

In a country with less

well-developed capital and credit markets, some direction of credit
accommodation may be needed.
In a broader sense, the International Monetary Fund is
providing a framework within which an over-all approach to supervisory
activities m a y be achieved in the area of creditworthiness and credit
granting in the international area.

Unrestrained commercial lending

might provide a country with credit in amounts so large as to require
no resort to the Fund.

This would, of course, mean that that country was

free to follow whatever policies it wished without the scrutiny or
conditionality of the Fund's credit-granting mechanisms.

The Fund is

increasingly looked to for indications about the creditworthiness of
borrowing countries.

Here there is the risk that extensive

coordination of private and international lending institutions could
result in the latter becoming allocators of credit flows.



extremi-- can be avoided if commercial banks are provided with adequate
information necessary to make their judgments on the economies and
external debts of the potential borrowers and if the bank supervisors
insist upon prudent policies.

Much of this depends upon the availability

of sufficient information on external debts to the commercial banks.
The communications responsibilities are therefore of high priority in
today's world of international banking.
The Federal Reserve looks at the consolidated position of
its banks whether at home or abroad and supervisors in foreign countries
often look at the subsidiaries of our banks located in their countries.
We both have an interest in the soundness of those subsidiaries as well
as in the strength of the over-all organization.

Cooperation is

increasing among the supervisors of banking in the world but I would
not wish to mislead you that we have reached the millennium where
central banks are in full cooperation or that bank supervisors are able
to obtain all the information they need.

There are still laws in some

countries and reluctance on the part of some bank regulators to share
supervision of foreign banks.

Some of this is based upon privacy laws

and some on the perceived policies of their governments.


compiling and making available aggregate data on international lending
by banks is increasing to a greater extent throughout the world and this
information provides hope that commercial banks making loans to
other nations or industries within other countries will be in a better
position to measure creditworthiness and arrange appropriate terms
and conditions for the loans they extend.


Thus far I believe we can say that we are achieving some
improved surveillance of multinational banks though there are some
significant problems.

As international banking grows it is obvious

that the control of a bank--where two or more commercial banks of
differing countries have an ownership position--creates problems of
supervision as well as possibilities of difficulties in management
and control.

Perhaps this is best illustrated by the problems we

have seen in joint venture efforts on the part of commercial banks
with diverse home offices in the fields of nonbanking activities.
It is well known that certain mortgage banking activities of some
commercial bank joint ventures have been in difficulty over the past
few years and the problems of achieving control as well as supporting
correction in the credit granting facilities to these mortgage banking
subsidiaries or joint ventures have been considerable.

There is a

potential for some increase in this type of problem, partly owing to
the insistence of certain countries that the depository institutions
of their territory be at least 51 percent owned by nationals.


automatically creates a spreading of management responsibility and
perhaps also a spreading of the responsibility for meeting the needs
of the particular bank for capital or lendable funds.

Perhaps in

even greater focus is the effort of those banks to enter into other
fields of endeavor, especially if the joint partner is a United States
bank where participation of such a bank in the other field of endeavor
is limited by Federal Reserve regulations.


None of what I have said should be construed as any criticism
of the banking regulations of a foreign nation.

We, in the United States,

have created our own supervisory program, have laid down specific
regulations on our banks and we expect those banks to adhere to the
laws and regulations of this nation, whether they are participating at
home or abroad.

Similarly, if other countries are to accept the

responsibility for their home office banks and their subsidiaries
worldwide, we must expect them also to maintain some degree of control
over those subsidiaries on the basis of their own banking laws.


extent of control and the means of accomplishing it are matters for
their determination as long as they do not contravene the laws of
the host country.
The United States has been reviewing the activities of foreign
banks in our country and within the past month Congress has moved
toward acceptance of legislation which creates a pattern of national
treatment of banks coming in from other countries to do business in
the United States.

In the past such banks have largely lived under the

laws and regulations of their home office, and United States regulatory
activity with regard to such banks has been superficial.

Now, however,

we are attempting to broaden our controls and place some limits on
foreign banking activity so that foreign banks are not in the position
of competitive advantage over our domestic institutions.

It is our

hope that this principle of national treatment will be well accepted by
both the foreign and local institutions and by the regulatory agencies
in foreign nati o n s .


This new effort on the part of the United States, however,
does not in any way substitute for the need for international cooperation
among central banks or their superintendents of banking.

This cooper­

ation, in m y judgment, must move even further than at present, not
only to maintain a broad look at banking solvency, liquidity, capital
adequacy and other similar measures across national borders, but also
to provide the information necessary for the commercial banks to do
their jobs even better in the competitive market place of the world.
Competition is obviously intensifying throughout the banking industry
and such competition must be carefully monitored to assure that safety
and soundness of the institutions is maintained.

As banks increase

their size and spread their responsibilities throughout the world,
there must be a careful monitoring and analysis of the degree of risk,
and the spreading of that risk to avoid overconcentrations.


larger the banking unit, of course, the more difficult would become a
failure of such a unit.
Consequently, in my closing remarks today, I want to emphasize
the need for continued cooperation and greater informational exchange
on the supervisory responsibilities and analysis work by central banks
and the superintendents of banking throughout the free world.

I hope

you join me in this feeling of urgency of the need to cooperate.


suggest that perhaps this conference can be the first step in a means
of cooperative central bank exchange of information on the common
commercial banks within our countries.


Thus I propose that GEMLA or the Western Hemisphere Governors
Conference sponsor a study to review the present level of cooperative
supervisory relationships and recommend new ways of achieving closer
ties which m i g h t :

Analyze and inform all regulators on the laws

and regulations governing entry into each country in the
banking area.


Review, monitor, and coordinate standards of

conduct for foreign banking units.

Establish means of obtaining early warning of

developing problems in foreign banks or major international
Our emphasis should be on informal consultation and an ability
to discuss problems directly without excessive documentation or formal
channels of communications.

As we build confidence in our ability to

exchange information perhaps an even broader effort might be undertaken.