Unit-02, PPT-02

International Banking Law

The Need for regulation of International
Banking-

 The need for regulating international banking arises on account of the

following factors:-
 The volume of financial flows are much higher than the trade flows.
 In Virtually all developed markets, the banking industry is more heavily
regulated than any other commercial or industrial sector. Prudential
rational for bank regulation is closely related to the monetary rational.
 Banks are in currently risk prone because their intermediary function
necessarily implies a relatively high degree of financial gearing, or ratio
of debt to equity capital.
 The wide spread branch network of bank exposes them to widespread
possible withdrawal of funds by depositors.
 The financial condition of the bank is not readily determinable even by
analysts with sophisticated techniques. The lack of transparency, which is
inbuilt in Banking, may by itself contribute to ill founded rumors that can
not be easily dispelled.
 High Financial gearing- Banks deal with money deposited by different
people and the intermediary function of bank employees are relatively
high degree of financial gearing, or the ratio of debt to equity capital.
Earlier landing and depository functions were largely
 separated in banking however in the early nineteenth-century following
the fusion of these two functions bank for operating on capital ratio of 40%
in Europe and 70% in North America, ratio that have since declined to
around 5% before the basal Accord.
 Withdrawal of funds which are widely spread by timing- Because of their
high financial leverage banks can be described as conditionally solvent. The
condition being that depositors do not collectively exercise their
contractual right of withdrawal and thereby force bank into insolvency.
Accordingly, a severe liquidity squeeze resulting from sudden deposit
withdrawal can very quickly be transformed into
 a solvency problem, as the victim Bank tries to unload essentially
unmarketable assets. the implication is that even the strongest of bank is
viable only so long as it continues to enjoy the confidence of Financial
Market, the business of Banking being in this literal sense becoming a
large-scale confidence exercise.
 Lack of Transparency:- The financial condition of a bank is not readily
determinable even by analyst with sophisticated technique as their
disposal, let alone ordinary depositor crucial parameters such as the quality
of the loan portfolio cannot be assessed on the basis of published accounts
or their public TV available information.
 Furthermore even if the relevant information was obtainable it would
get outdated very quickly, since Bank can adjust their risk profile
within a very short span of time.
 This lack of transparency means that while on the one hand, a bank’s
financial condition can be deteriorate markedly before financial
markets become aware of the fact, the other hand even the soundest
of institution can fall victim of ill founded rumors.
The BCCI International Affair

 The Bank of Credit and Commerce International (BCCI) was an

international bank founded in 1972 by Agha Hasan Abedi, a
Pakistani financier. The bank was registered in Luxembourg with head
offices in Karachi and London. A decade after opening, BCCI had over 400
branches in 78 countries and assets in excess of US$20 billion, making it the
seventh largest private bank in the world.
 BCCI came under the scrutiny of financial regulators and intelligence
agencies in the 1980s, due to concerns that it was poorly regulated.
Subsequent investigations revealed that it was involved in massive money
laundering and other financial crimes, and had
 illegally gained the controlling interest in a major American bank. BCCI
became the focus of a massive regulatory battle in 1991, and, on 5 July of
that year, customs and bank regulators in seven countries raided and
locked down records of its branch offices during Operation C-Chase.
 This action was followed in January 1992 by the issuing of compulsory
winding up orders by both British and Luxembourg Court against the
Luxembourg and Cayman Island based subsidiaries of group BCCI, SA
and BCCI Overseas respectively- presaging the liquidation of most of the
banking group.
 The immediate importance of this affair is the consideration of

changes in the domestic supervisory practices of Overseas Bank

which were prompted in the UK and immediately followed in India.

 These changes are enumerated as under:-
 1- Host country should have the following in place-
 A- The bank, Central Bank Of the country to extend on-site

supervision,
 B- The bank to devote more resources to detection of frauds,
 C- A duty to be imposed on auditor to report suspicion of fraud or

malpractice to the Bank.

 D- Overseas Bank to be subjected to a full scope review by reporting

accountants on an annual basis,

 E- “Minimum Criteria” for authorization to be strictly interprated,
 F- The bank if necessary to be given explicit power to refuse or

revoke authorization on the grounds that applicant or Bank cannot

be effectively supervised because of the group structure,

 2- Other international arrangements-
 A- supervisory standard to be subject to independent monitoring
 B- International supervisory cooperation to be enhanced
 C- The problem of bank secrecy provisions to be tackled
Legal Issues in International Banking-

 many of the legal problems associated with international banking

transaction arise because such transaction in inevitably impinge upon
the laws of more than one country.
 At the very least, laws of two countries will be applicable and in many
transaction considerably more than two. For example a syndicated
loan Agreement may impinge upon the laws of at least a dozen
different countries, depending upon the geographical makeup of the
Bank Syndicate.
 Even in a simple two party loan Agreement a number of different laws
 may become involved because an independent currency is used, or the
loan is guaranteed by third party living in a different country.
 Whenever a court is seized of a case which contains a foreign element,
principles of private international law, or conflict of laws, come into
operation. It has been said that the object of private international law are-
 1- to ascertain whether a Court has jurisdiction to determine the case
before it,
 2- to identify which system of law the court will apply to the facts of the
case before it
 3- to determine whether the court will recognize or enforce judgment
obtained in a foreign court.
 it is of utmost importance that the legal aspects of any international
banking transaction are made as predictable as possible. This question of
predictability does not normally pose a significant problem in the purely
domestic banking transaction, since the rights and obligations of the
various parties will normally be determined by the local system of law
under which the contract.
 This will not necessarily be the case in international banking and it will
therefore be crucial to structure the transaction documentation
 within a competent legal framework.
 The most effective way in which this can be achieved is by selecting
both the systems of law which will govern the substantive aspects of
the transactions and the court which will have jurisdiction to resolve
any dispute that may arise.
 The court will apply the law of forum.
 It counts the factors that connect legal issues to the relevant state
and applies the laws that suits appropriately.
 The law of nationality and residence are good example the question
of title of a land is determined by the state in which land is situated
sometimes the place where transactions has taken place is
considered.
Bank for International Settlements

 The Bank for International Settlements (BIS) is an international

financial institution owned by central banks that "fosters international
monetary and financial cooperation and serves as a bank for central
banks". The BIS carries out its work through its meetings, programmes
and through the Basel Process – hosting international groups pursuing
global financial stability and facilitating their interaction. It also
provides banking services, but only to central banks and other
international organizations. It is based in Basel, Switzerland, with
representative offices in Hong Kong and Mexico City.
Establishment:

The BIS was established in 1930 by an intergovernmental

agreement between Germany, Belgium, France, the United Kingdom, Italy, Japan,

the United States, and Switzerland. It opened its doors in Basel, Switzerland, on 17 May

1930.
The BIS was originally intended to facilitate reparations imposed on Germany by

the Treaty of Versailles after World War I, and to act as the trustee for the German

Government International Loan (Young Loan) that was floated in 1930. The need to

establish a dedicated institution for this purpose was suggested in 1929 by the Young

Committee, and was agreed to in August of that year at a conference

 at The Hague. The charter for the bank was drafted at the

International Bankers Conference at Baden-Baden in November, and

adopted at a second Hague Conference on January 20, 1930.

According to the charter, shares in the bank could be held by

individuals and non-governmental entities.

 However, the rights of voting and representation at the Bank's

General Meeting were to be exercised exclusively by the central
banks of the countries in which shares had been issued.
 By agreement with Switzerland, the BIS had its corporate existence
and headquarters there. It also enjoyed certain immunities in the
contracting states (Brussels Protocol 1936).
 Organization of central banks- As an organization of central banks,
the BIS seeks to make monetary policy more predictable and
transparent among its 60-member central banks, except in the case
of Eurozone countries which forfeited the right to conduct monetary
policy in order to implement the euro. While monetary policy is
determined by most sovereign nations, it is subject to central and
private banking scrutiny and potentially to speculation that
 affects foreign exchange rates and especially the fate of export economies.
BIS aims to keep monetary policy in line with reality and to help
implement monetary reforms in time, preferably as a simultaneous
policy among all 60 member banks and also involving the International
Monetary Fund.
 Regulates capital adequacy- Capital adequacy policy applies to equity

 and capital assets. These can be overvalued in many

circumstances because they do not always reflect current market
conditions or adequately assess the risk of every trading position.
 Accordingly, the Basel standards require the capital/asset ratio of
internationally active commercial banks to be above a prescribed
minimum international standard, to improve the resilience of the
banking sector.
Goal: monetary and financial stability

 The stated mission of the BIS is to serve central banks in their pursuit

of monetary and financial stability, to foster international

cooperation in those areas and to act as a bank for central banks. The

BIS pursues its mission by:

 fostering discussion and facilitating collaboration among central

banks;
 supporting dialogue with other authorities that are responsible for

promoting financial stability;

 carrying out research and policy analysis on issues of relevance for
monetary and financial stability;

acting as a prime counterparty for central banks in their financial transactions; and

serving as an agent or trustee in connection with international financial operations.

The role that the BIS plays today goes beyond its historical role. The original goal of

the BIS was "to promote the co-operation of central banks and to provide
additional facilities for international financial operations; and to act as trustee or
agent in regard to international financial settlements entrusted to it under
agreements with the parties concerned", as stated in its Statutes of 1930.
Role in banking supervision:

 The BIS hosts the Secretariat of the Basel Committee on Banking

Supervision and with it has played a central role in establishing
the Basel Capital Accords (now commonly referred to as Basel I) of
1988, Basel II framework in 2004 and more recently Basel
III framework in 2010.
Thanks