© Copyright 2005 All Rights Reserved 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

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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

© Copyright 2005 All Rights Reserved 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

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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 pre- emptive or corrective actions promptly & in a coordinated manner.

© Copyright 2005 All Rights Reserved 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.

© Copyright 2005 All Rights Reserved 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?

© Copyright 2005 All Rights Reserved Thank you