Financial Crises & the Presence of Foreign Banks - World Bank

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Financial Crises & the Presence of Foreign Banks - World Bank

132.3) RegulationThe Basle Concordat of 1975 (amended in 1983), established that home countrysupervisory authorities are responsible for solvency supervision of the parent’s branchesabroad. This is logical as it is the home country authorities that have legal access to theparent’s books, and because a branch fails when its parent fails. Host parent countrysupervisory authorities are jointly responsible for solvency supervision of subsidiaries. Againthis is logical as the subsidiary is a legal person of the host country and so the localauthorities have access to its books. Also, a subsidiary can fail even when the parent issolvent. However, the home country authorities are responsible for supervision on aconsolidated basis as subsidiaries affect the parent’s solvency and the parent cannot disclaimall responsibility for its subsidiaries. This provision for joint responsibility followed thecollapse of Banco Ambrosiano in 1982.When Banco Ambrosiano collapsed, the Italian authorities protected Italiandepositors by transferring the bank's business to a new Italian entity. However, theydisclaimed responsibility for the obligations of Ambrosiano’s Luxembourg subsidiary andthe Latin American subsidiaries.When BCCI failed in 1991, the local regulators in such countries as Canada andMauritius dealt with the local operations. The Bank of Canada closed Bank of Credit andCommerce Canada. Bank of Mauritius issued a license to the Somaia group to establishDelphis Bank to take over BCCI’s banking business. When Demirbank failed in Turkey in2000, its subsidiary in Bulgaria continued to function and there was no run on the bank.Instead, the Bulgarian subsidiary was simply an asset that the Turkish authorities sold.Countries differ in terms of whether they permit foreign banks to operate asbranches, affiliates or subsidiaries. Banks’ use of affiliates is frequently a response to host

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