Transcript Presentation - JP Sabourin

Panel 1: Setting out the Issues
3 May 2007
Presentation by:
J. P. Sabourin,
Chair of Executive Council & President of the International Association of
Deposit Insurers, and
Chief Executive Officer of the Malaysia Deposit Insurance Corporation
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Bank failures

Wide-ranging adverse implications but none as damaging
if the failure involves an internationally active bank.

Spill-over effects expose financial safety net players to
various insolvency regimes.

Collapse of BCCI was a wake up call. Responses include –
 Mechanisms for consolidated supervisory oversight & cross
border exchange of information.
 Reviews done on different insolvency regimes in the hope of
finding commonality.
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BCCI
What helped BCCI to hide the true
state of its financial affairs for so
long?
 Complex corporate structure
 Environment of weak supervision
 Regulatory loopholes
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BCCI
So where were the auditors?
 BCCI’s operations were divided between 2 auditors
neither of whom audited all of BCCI’s operations
therefore, no full & clear picture of its operations
 Assurance by the Bank of England that the auditors
should continue to certify BCCI’s books, reinforced by
an agreement that the Abu Dhabi government,
supervisor and BCCI would work with the auditors to
restructure the bank & avoid its collapse
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BCCI
And where were the regulators &
supervisors?
Luxembourg & U.K.
The Luxembourg Monetary Commission did not
want to take the role of lead regulator as the
operational headquarters was in London. But
Bank of England did not want to accept the
responsibility of supervising the global
operations of a bank that it did not charter.
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BCCI
What were the costs of BCCI’s failure
to the global financial system?
Financial markets
Little impact as most sophisticated market
participants had cut lines to BCCI long before
its collapse.
Retail depositors
Felt most acutely over 380 banking offices in
73 countries.
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BCCI
What were the regulators’ & supervisors’ responses?
 Realisation that there was no consolidated oversight of
the global activities of BCCI.
Response – Formation of the “Regulatory College”
comprising supervisory authorities from 8 countries to
provide a cooperative oversight structure & share
information.
 Realisation that there was a lack of power to deal with
international banking groups.
Response – Strengthening of the Concordat by the Basel
Committee whereby a bank is required to obtain the
consent of both its home country regulator & host country
regulator to establish a branch in a jurisdiction outside its
home country.
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BCCI
Changes in U.K. & Canada
 Canada – Following the closure of 2 banks in the
1980s led to a substantial overhaul of the
Canadian prudential regulatory system.
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Post BCCI lessons
4 main areas of concern:
 Different insolvency regimes in different countries.
 Liquidators in different jurisdictions have different
objectives.
 Different right of set-off across bankruptcy regimes.
 Uncertainty in some jurisdictions where assets are paid out
to creditors may be traced & reclaimed by liquidator. This
can upset the finality of transactions.
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Post BCCI lessons
Are these responses enough?
 Should there be a super regulator that maintains a
global repository of information on internationally
active banks?
 Availability & sharing of information regarding
emerging problems that may have implications on
stability of global financial system would assist in the
monitoring & implementation of appropriate preemptive or corrective actions promptly & in a
coordinated manner.
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Post BCCI lessons
Do regulators & deposit insurers have a duty of care?
 During 1990/91, Abu Dhabi, the auditors, BCCI & Bank of
England reorganised BCCI.
 However, the public knew nothing of the fraud & criminal
activities that had perpetuated within BCCI, & continued
to do business with BCCI. And this certainly caused
substantial damage to innocent depositors & customers of
BCCI who would have discontinued their dealings with
BCCI.
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Concluding thoughts
 Should the regulator be responsible for the broader good of
the financial system at the detriment of the public?
 If yes, then at what stage of the deterioration of a problem
bank should the regulator make such an announcement?
 How should one structure public awareness efforts under such
circumstances without creating undue panic or instability in
the financial system?
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Thank you
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