Is there a future for

international banks?

GROUP MEMBERS
Shahzad Haroon
Salman khan
Shehla Riaz
Usman Ghani
Sajid Khan
Waqar khan
Ibrar
Zeshan shahzad
Awan

Outline of the presentation

History of global financial crises impact of international banking

The new Basel iii
Key principles of the Basel iii
Why supervisors take this national approach
Coordination failure
Financial Trilemma
Cost of local capital and liquidity rules
Ring-fencing
how to keep international banks alive
Recapitalization
An illustration
Concluding remarks
Questions and answer

History

Global financial crisis

Traditional consolidated approach
Stand-alone approach
According to McCauley et al (2012) stand
alone approach was this move from the
international to the multinational bank
model.

The new Basel III

International framework for liquidity risk
measurement, standards and monitoring,
presents the Basel Committees1 reforms to
strengthen global capital and liquidity rules
with the goal of promoting a more resilient
banking sector.
The objective of the reforms is to improve
the banking sectors ability to absorb shocks
arising from financial and economic stress,

Key principles of the Base iii

Capital requirements
Leverage ratio

Liquidity requirements

why supervisors take this

national approach?
This base iii framework is more costly as
banks must have to maintain their capital
and liquidity requirements so why
supervisors follows this?
According to (Schoenmaker 2013)
Coordination failure in international crisis
management appears to be the root cause.

Coordination failure

According to Freixas (2003) shows that

national authorities only consider the local
systemic effects of a bank failure. Crossborder externalities are ignored, this analysis
were named by Freixas as Financial
trilemma

Financial trilemma
This states that the objectives of financial
stability, international banking, and national
financial autonomy are not compatible.

Costs of local capital and

liquidity rules
Recognising that international coordination is
likely to fail,
supervisors have concluded that they must
resolve the local operations of banks.
They have left the integrated, consolidated
approach to supervision and apply capital and
liquidity rules at the local level.
International banks then become a string of
national subsidiaries within a multinational bank

Cont..
At the IMF, Eugenio Cerutti and others (2010)
have done research on the impact of local
capital requirements for a group of 25 Western
banks operating in Central and Eastern Europe.
Under a scenario of a 2% decline in GDP and a
2% increase in interest rates, these banks
need to raise extra capital of 45 billion in case
of ring-fencing. The extra capital needed is
only 25 billion without such ring-fencing.

Ring-fencing
Guarantee that (funds allocated for a
particular purpose) will not be spent on
anything else.

CONT.
These local liquidity and capital holdings will be
trapped in the national subsidiaries, as the
national supervisors want to keep these extra
safety valves at the national level, in particular
when a crisis hits and liquidity and capital should
be directed to where most needed.
It feels like not being able to use the firemen and
water resources of a neighboring village, when
the villages fire brigade is fighting a raging fire.

How to keep international banks alive?

The solution is a supranational approach for

supervision and resolution. The bottom line
is to arrange an appropriate fiscal backstop
through burden sharing (Goodhart and
Schoenmaker 2009).

Figure 1 shows the improvement

in resolution

Recapitalization cont.
The starting point is that a recapitalization is
efficient when the benefits (in the form of
financial stability) exceed the costs. The
solid diagonal in Figure 1 represents the line
where benefits (B) and costs (C) are equal.
The left dashed line measures the home
country benefits.

Cont
In the supranational approach (all benefits in
the home country and the rest of Europe are
incorporated by the supranational body),
area C, which indicates the area of
inefficiency, is smaller under the
supranational line than under the home
country line.

An Illustration
suppose the cost of recapitalizing an ailing bank is 100, benefits are
150 ,if only the home country benefits are taken into account: 80
(that is, 53% multiplied by 150).
Faced with a cost of 100, the home country decides not to
recapitalize.
Although recapitalization is the optimal strategy (benefits exceed
costs, there is no recapitalization.
supranational approach would see that the European benefits are
114 (that is, 76% multiplied by 150). This 76% of European benefits
includes the benefits in the home country (53%) and other European
countries (23%).
As these benefits now exceed cost, the European body recapitalizes
the ailing bank, which is the efficient outcome

Concluding remarks

The Bank for International Settlements could

play the role of supervisor for global banks
(obviously the so-called globally
systematically important banks) and the IMF
the role of resolution authority for these
banks. The IMF already enjoys the necessary
fiscal backstop of its member countries.