Controlling The Climate That Let Bcci BloomRobert Kuttner
The seizure of the $20 billion Bank of Credit & Commerce International (BCCI) invites some intriguing questions about banking regulation. The BCCI scandal underscores the mismatch between international banks and nation-bound regulators. BCCI based its operations in Luxembourg, the Netherlands Antilles, the Cayman Islands, and Abu Dhabi-not places renowned for tough banking regulation. Even nations with strong regulators, including the U.S., were asleep at the switch.
The BCCI case may be unique in the complexity of its network and the apparent extent of its fraud. But it is hardly the first case in which the ability of private bankers to move money around the globe outran the ability of national regulators to follow the paper trail. As a result of this regulatory failure, depositors-or taxpayers-will lose at least $4 billion and maybe as much as $15 billion.
In theory, two procedures should have ensured effective regulation of BCCI. First, under the 1975 Basel Concordat, central bankers agreed that the home country of a global bank would be responsible for supervising all of its operations. But little Luxembourg proved no match for BCCI, with its far-flung network of affiliates, subsidiaries, and laundries.
NO SHUTOUT. Second, any country where a foreign-based bank proposes to operate may shut that bank out if local authorities suspect the bank's competence or honesty. But in this case, no country did. Even the U.S. Federal Reserve was gulled, with an assist from power-lawyer Clark M. Clifford, into approving bcci's acquisitions in the U.S. despite the Fed's misgivings about the parent bank. It was the Bank of England, not the Federal Reserve, that belatedly launched a major investigation of what now appears to be not just fast-and-loose banking but massive fraud.
The ability of global banks to seek out the weakest regulatory forum is not unlike the situation in the U.S., where banks are able to select the most accommodating state or federal regulatory environment. Allowing banks to pick their regulator, on whatever scale, undermines the logic of regulation. If Luxembourg is not up to the regulatory job, it should not be a designated regulator for global banks.
What's required is much tighter international collaboration, as well as a convergence of regulatory standards. Each nation's bank regulation is vulnerable to national political pressures. But central bankers, acting in concert, can keep one another honest. Some international agency, perhaps the Bank for International Settlements (BIS), which is sometimes called the central bankers' central bank, needs to supervise the supervisors. There is no legitimate reason for a major international bank to operate from obscure islands, other than to avoid taxes or regulation. Moreover, closely held private banks such as BCCI, which are not subject to scrutiny under securities laws, should not be allowed to acquire retail banks freely and control them.
The underlying problem is that commerce today is international while regulation is national, and regulation itself is out of fashion. A chain of de facto cooperation among central bankers is only as strong as its weakest link. The major central banks reluctantly acknowledged this problem, first in the 1975 Basel Concordat and again in 1988, when they agreed on a common minimum standard of bank capital equal to 8% of bank assets, which becomes effective in 1992.
Nations are reluctant to share or to delegate national sovereignty, especially on something as basic as banking regulation. But, of course, national sovereignty has already been ceded-to private international bankers who can outrun national laws. In international banking, the U.S. and Britain, the traditional stewards of global finance, are usually the regulatory hawks. Japan and Germany, in contrast, have tended to view the strength of their own banks as a source of competitive advantage and have cared less about the international banking system as a whole. Moreover, coming from corporatist societies, in which a tight Establishment of senior bankers, government officials, and business leaders-rather than a rule book-attends to the solvency of banks, the Germans in particular have felt little need for a new legalistic global schema.
WICKED LEFT-RIGHT. Ironically, however, it is in legalistic America where bank regulation has lately become degraded. Under the Reagan and Bush Administrations-with a nice bipartisan assist from such Democrats as Clark Clifford and California Senator Alan Cranston-the U.S. has failed to police its own banks, let alone the branches of foreign ones. America, with its lethal brew of Republican ideology and Democratic opportunism, is no role model of bank supervision.
Indeed, if the Bank for International Settlements had been empowered to toughen up lax regulatory environments, it should have placed the U.S. on the same list with Luxembourg, the Netherlands Antilles, and the Caymans as nations not competent to regulate large global banks. We need greater internationalization of bank supervision not just to keep shady bankers from falling between the national regulatory cracks, but to put some spine in America's own feeble stewardship.
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