Regulating international banking is difficult due to the absence of key safeguards that countries use to prevent domestic bank failures, such as deposit insurance and lender of last resort facilities. The Basel Committee aims to enhance international regulatory cooperation by standardizing banking regulations and facilitating information sharing between countries. As emerging markets and nonbank financial institutions have grown in recent decades, there is an increased need for cross-border regulatory cooperation to monitor risks and promote stability in the global financial system.

1. +
Regulating International Banking

2. +
The Problem of Bank Failure
 A bank fails when it is unable to meet its obligations to its
depositors.
 Governments attempt to prevent bank failures through extensive
regulation of their domestic banking systems.

3. +
Problem of Bank Failure
 The main U.S. safeguards to reduce the risk of bank failure:
 Deposit insurance
 Reserve requirements
 Capital requirements and asset restrictions
 Bank examination
 Lender of last resort (LLR) facilities
 The Fed lends to banks facing massive deposit outflows to
satisfy their depositors’ claims.

4. +
Difficulties in Regulating International
Banking
 Deposit insurance is essentially absent in international banking.
 The absence of reserve requirements reduces the stability of the
banking system.
 Bank examination to enforce capital requirements and asset
restrictions becomes more difficult in an international setting.
 There is uncertainty over which central bank is responsible for
providing LLR assistance in international banking

5. +
International Regulatory Cooperation
 Offshore banking is largely unprotected by the safeguards national
governments have imposed to prevent domestic bank failures.
 Basel Committee
 It is a group of central bank heads from 11 industrialized
countries.
 It enhances regulatory cooperation in the international area.
 Its 1975 Concordat allocated national responsibility for monitoring
banking institutions and provided for information exchange

6. +
International Regulatory Cooperation
 A major change in international financial relations in the 1990s has
been the rapidly growing importance of new emerging markets as
sources and destinations for private capital flows.
 The trend toward securitization has increased the need for
international cooperation in monitoring and regulating nonbank
financial institutions

7. +
Summary
 Regulatory and political factors have encouraged offshore
banking and currency trading