Read the following article and look up the words in bold if necessary.
THERE is always a bright side. To date, the banks that have imploded as a result of the credit crunch have been largely domestic. It has been clear from the start which national authority is responsible for clearing up the mess. The remarkable rescue of Bear Stearns by the Fed over a single weekend is testament to what a determined regulator can achieve. If a large international bank went belly-up, things would be far murkier. “So far we've been lucky,” says the chairman of one national regulator. “There is no formal framework for solving a cross-border crisis.”
It may not be entirely down to luck: banks operating in just one country are more likely to get into serious trouble than ones with an international spread of business. But the crisis may encourage more banks to diversify across borders, so the question of how the authorities would work together if a big bank were to fail will become more pressing.
When things are going well, dialogue is relatively easy. Bilateral relationships between home regulators (who have primary responsibility for supervision) and host regulators are generally healthy. In Europe, the Committee of European Banking Supervisors has been running a project for a handful of cross-border banks in which their principal regulators have formed supervisory colleges to share information and conduct joint inspections. There is much more of this sort of thing to come. In April European Union finance ministers signed an agreement to tighten up monitoring of the continent's big cross-border banks. American and British officials are keen to install a transatlantic watchdog.
Working out whose job it would be to save a border-crossing bank in trouble is far more contentious. Would taxpayers in a bank's home country stump up for the cost of rescuing its operations abroad?
“If a bank is systemically important at home, the authorities would have an incentive to intervene to ensure an orderly resolution, thereby also directly or indirectly supporting its operations abroad,” reckons Mr Borio of the Bank for International Settlements. Yet crisis simulations involving the supervisors of Nordea, a bank that has a substantial market share in four Scandinavian countries, suggest that co-ordination problems are thorny. “The exercises are great fun but have terrible outcomes,” says one observer.
In cross-border banking, institutions that are “too big to fail” are not the only problem. There are also those that are “too big to save”: big banks in small countries whose coffers could not cope with the cost of a bail-out. UBS and Credit Suisse, two Swiss banks with a sprawling international presence, are firmly in this camp. Swiss officials shrug nervously when asked what would happen if either of these two giants were felled.
And then there are those that might be described as “too small to fail”: banks that are not systemically important in their home market but wield lots of clout in foreign markets. Take a bank like Standard Chartered, which has its headquarters in London but makes its money in emerging markets. Would British taxpayers and regulators step in if the bank's operations in, say, Asia went wrong? Many countries in Eastern Europe have banking systems dominated by foreigners (see chart 11). The authorities in New Zealand, where much of the banking system is in Australian hands, require foreign branches above a certain size to incorporate locally and to appoint local boards.
Agreeing burden-sharing arrangements for cross-border institutions in advance is tough. Most regulators believe that decisions on funding and the like will have to be thrashed out when the time comes. But the cack-handed rescues of Britain's Northern Rock and Germany's IKB hardly inspire trust. In an industry where crises unfold at high speed and confidence is all, hoping for the best is not much of a strategy.
