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Chapter 5: International Banking Risks (Types of International Banking…

- - - - :key: A key policy decision in designing the framework or structure of the bank supervisory system is whether there should be a single bank supervisory authority or multiple bank supervisors.
      - :key: Although the previous conceptual literature covers a number of possible advantages and disadvantages to each option, perhaps the strongest reason for some to advocate a single bank supervisory authority is the fear of a competition in laxity between multiple bank supervisors, while those who favour a system with two or more bank supervisors stress the benefits of a competition in ideas among multiple bank supervisors.
    - - ✨ Countries must also decide whether to assign responsibility for bank supervision to the central bank.
      - ✨ As with the issue of single or multiple bank supervisors, the conceptual literature is split on the relative advantages and disadvantages of the central bank being a bank supervisor.
      - ✨ Perhaps the most strongly emphasized argument in favour of assigning supervisory responsibility to the central bank is that as a bank supervisor, the central bank will have first-hand knowledge of the condition and performance of banks.
      - ✨ This in turn can help it identify and respond to the emergence of a systematic problem in a timely manner.
      - ✨ Those pointing to the disadvantages of assigning bank supervision to the central bank stress the inherent conflict of interest between supervisory responsibilities and responsibility for monetary policy.
      - ✨ The conflict could become particularly critical during an economic recession, in that the central bank may be drawn to pursue a too-loose monetary policy to avoid adverse effects on bank earnings and credit quality, and/or encourage banks to extend credit more liberally than warranted based on credit quality conditions to complement an expansionary monetary policy.
    - - 🌸 Much of the discussion about MNCs doing consolidating financial services supervision takes as its starting point the observation that these kind of companies are growing increasingly complex.
      - 🌸 Financial conglomerates that operate in the banking, securities, and insurance sectors are among the most powerful MNCs in many countries.
      - 🌸 Some have argued that a supervisor with broad scope to cover all financial services is necessary to supervise such entities effectively and in particular to insure that supervisory oversight of risk management by such conglomerates is not fragmented, uncoordinated or incomplete.
      - 🌸 The most significant argument against a supervisory authority with broad scope is that it would result in an undue concentration of power that would otherwise be dispersed among several agencies.
      - 🌸 This could increase the likelihood of regulatory capture and retard financial innovation.
    - - 🍬 The approach in which the supervisory authorities supervise banks is quite important
      - 🍬Indeed, unless these authorities appropriately intrpret and enforce the regulations governing banks,the regulations themselves become meaningless.
      - 🍬 Perhaps more importantly, it is the supervisorswho have direct contact with the banks and therefore represent the main line of defence against unsafe and unsound banking practices
      - 🍬 Supervisory authorities therefore seek to detect and assess activities and practices
      - 🍬There are several main dimensions to bank supervisory approaches
      - 🍬 Aprimary supervisory approach to assessing the riskiness of banks is through the examination process. The nature of this process is hard to quantify, and cross-country data are the thin at best.
      - 🍬These dimensions include enforcement powers, the degree of disclosure supervisory authorities must comply with, and the independence of supervisory authorities
      - 🍬 The last aspect of the bank supervision considered here is independence. As measured here, independence simply refers to whether or not the supervisors are legally liable for their actions.
      - 🍬The last aspect of the bank supervision considered here is independence. As measured here, independence simply refers to whether or not the supervisors are legally liable for their actions.
    - - ☄️ Money laundering is not new to the financial system.
      - ☄️ Although it is difficult to identify its advent but it can be traced to the 1930s in the US.
      - ☄️ Money laundering is defined as the act or a process of transforming profits earned from a criminal or illegal activity into legal profits
      - ☄️For example, money earned from drug trafficking, arms smuggling, trafficking in stolen art, body parts, nuclear secrets, and weapons,money used by the terrorist group, kidnapping for ransom, pariah states undertaking financial transactions to escape from international authorisations, in order to acquire technologies and components for weapon of mass destruction, and individuals seeking to avoid paying their taxes.
      - ☄️There are three stages of money laundering:
        
        🌟 Placement
        The first stage is the placement of currency into a banking and financial institutions e.g commercial bank, brokerage house, investment bank, etc.
        
        🌟 Layering
        The second stage is the movement of funds from one institution to another in order to disguise the original source and ownership of the funds.
        
        🌟Integration
        The third stage is the time when the funds, having been laundered are reinvested into a legitimate business.
      - ☄️Money laundering is a process by which proceeds derived from criminal or illegal activities are converted to legitimate funds
      - ☄️The prevention measures of AMLA
        
        Develop a customer acceptance policy and procedures to address the establishment of business relationships with the customer
        
        Conduct customers due diligence (reasonable care) and obtain satisfactory evidence in its records, the identity and legal evidence thereon.
        
        Keep all records and the documents of transactions, in particular, those obtained during customers due diligence procedures, for at least six years and to ensure the retained documents are able to create and audit trail.
        
        Shall conduct on going customers due diligence to examine and clarify the economic background and purpose af any transactions.
        
        promptly submit a suspicious transactions report to the Financial Intelligence Unit in Central Bank when any of its employees involved proceeds from an unlawful activity
        
        Appoint one or more officers at the senior management level to be the compliance officer responsible for the submission of the suspicious transaction reports to the Financial Intelligence Unit in Cemtral Bank.
        
        Provides training and guidance to staff in the operation of procedures and controls relating to anti- money laundering.
    - - :explode: BCBS is a commitee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1974
      - :explode: Objective is to improve understanding of fundamental supervisory aspects and increase the quality of banking supervision worldwide
      - :explode: BCBS frames guidelines and standards in different areas. Some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision
      - :explode: Committee members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the UK and the US
      - :explode: The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. However, the BIS and the Basel Committee remain two distinct entities.
      - :explode: BCBS formulates comprehensive supervisory standards and guideline and recommends statements of best practice in banking supervision (see bank regulation under Basel III Accord) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems
      - :explode: Basel III is a comprehensive set of reform measures developed by the BCBS in order to strengthen the regulation, supervision and risk management of the banking and financial sector
    - - : :tada: Emerged in the 1960s and 1970s as a response to distortionary regulations in developed economies
      - :tada: Such measures included interest rate ceilings, restrictions on the range of products supervised financial institutions could offer, capital controls and high effective tax rates
      - :tada: OFCs exist in large part because they offer financial market participants tax, regulatory and supervisory advantages not available in their home markets
      - :tada: Futhermore, the nature of financial activities in OFCs highlights many of the challenges internationally cooperative supervisory groups face in encouraging transparency and disclosure
      - :tada: Offshore finance is the provision of financial services by banks and other entities to non-residents
      - :tada: IMF suggests a more practical definition
        
        Financial systems with external assets and liabilities out of proportion to domestic
        
        Financial intermediation
        
        Relatively large numbers of financial institutions engaged primarily in business with non-residents
        
        Provision of some or all of the following services including low or zero taxation, moderate or light financial regulation, banking secrecy and anonymity
    - - :fire: The WTO General Agreement on Trade in Services (GATS) and its Annex on Financial Services (ANNEX) took effect in 1999, specify the general principles that govern cross-border trade in financial services
      - :fire: The GATS and the ANNEX also specify the restrictions that may be imposed on trade in services for prudential purposes by the current 161 WTO member countries
      - :fire: The important point for their purposes is, a country may implement regulatory measures in contravention of its GATS obligations and commitments so long as they are taken for prudential reasons
      - :fire: This is so-called prudential carve-out, however, cannot be used as a means to avoid a member country's obligations and commitments
      - :fire: The difference between a prudential and a protective measure, both of which restrict trade in financial services, may be difficult to determine because the ANNEX and the GATS itself do not provide any specific guidance regarding the sscope and extent of the prudential exception
      - :fire: The GATS even prohibits member countries from listing prudential restrictions in their schedules of commitments
      - :fire: Member countries retain the discretion to invoke prudential regulations to restrict cross-border trade in financial services (despite any commitments) at any time so long as the measures are taken for prudential reasons
    - - :<3: The fundamental features of islamic banking include
        
        :star: Prohibition against the payment and receipt of a fixed or predetermined rate of interest i.e riba
        
        :star: This replaced by profit and loss sharing (PLS) arrangement where the rate of return (ROR) on financial assets held in banks is not known and not fixed prior to the undertaking of the transaction.
        
        :star: The activities must be syariah compliance i.e halal, no gharar and no maiysir
        
        :star: Five essential element need to be fulfilled in order to make a contract as valid under islamic : buyer, seller, asset, price, and ijab qabul
      - :<3: It is consistence with one of the following two systems of operation
        
        :star: Two- tier Mudarabah
        
        -They have a asset and liabilities side. The liabilities if depositors enter into it, the profit must be sharing. Depositor act as capital provider by providing fund and bank act as an entrepreneur.
        
        The assets side, the bank, in turn, enters into Mudarabah contract with agent entrepreneur who search for investable fund and who agree to share profit with bank according to a certain percentage stipulated in the contract
        
        :star: Two windows
        
        Bank liabilities divide by two i.e demand deposit and investment deposit
        
        Demand deposit are assumed to be placed as Amanat, thus they are considered to belong to depositors at all times.
        
        investment deposit are choice of depositors that all risk are in depositor. Bank only charge a fee.