In short, banks that have sizeable subsidiaries in foreign jurisdictions will need to walk through the recommendations in this paper. Precisely what is classified as sizeable I can`t say but then neither does BIS:
``The Basel Committee has not defined ``significance`` for purposes of determining which internationally active banking subsidiaries are ineligible to make use of the hybrid approach and Host supervisors are the ultimate arbiters of whether a subsidiary is significant within a given jurisdiction``
While insight for identifying a banks significance factor is probably a relatively obvious step, I can see such a nebulous statement causing some debate between the banks and their associated regulators, particularly with regulators that are behind the game and it is most likely that it will be those countries that cluster a larger collection of foreign banks.
None the less without becoming tied to the semantics at this point, the paper is a beacon on the hill for the absolute blind (pun intended) with its main emphasis being an outline of the key elements of how to co-operate with a supervisor. That is, it re-iterates the very perceptible in the importance of sharing information between home-host banks to home-host regulators and this information may include measurement approaches but most likely `colleges` are going to have to work together.
While some might find this slightly amusing, perhaps audaciously so, I actually have no intention to mock BIS for writing several pages on how banks need to communicate with regulators and what is expected of them in doing so because on the ground in many respects this is what regulators have to deal with much of the time as worrying as that may seem.
Anyway once we move through the paragraphs of general principles for information sharing, scope and frequency of information sharing, mechanics of information sharing and responsibilities of banks, we reach the gritty bits and bobs.
``Banks should be able to quantify the diversification benefits factored into the capital allocated to the subsidiary and to demonstrate that mechanisms are in place to facilitate such capital transfers.``
That isn`t so easy to do across clearing zones and currencies, on the surface it appears very straight forward but the addition of the word diversification in the context of capital goes hand-in-hand with of course non-diversified and in this way it will require banks to dimension how easy it would be to pass capital over without leaving the host entity under capitalised, policy will also need to consider timing and authority. In some cases dependency is likely to exist however fortunately for the banks they don't have to show how to calculate any knock on effects or correlation. Conceptually the statistics are relatively standard in such a top level model however the bank might need to support these models with data or show the robustness of them using hypothetical situational analysis and that is going to require a little bit of creativity.
Next, stability; ``This implies that capital amounts allocated to subsidiaries should not fluctuate unduly from one period to another``. This is all good assuming the bank is static, but operations gear up and down all the time and most banks are going to need to track such strategic changes however very few actually do in line with operational risk agendas.
Banks can of course run different modes of sophistication between one subsidiary and the next or run stand alone AMA for a subsidiary as stated in the article but if a bank is looking to have a centralised operational risk framework where it calculates capital internally for each foreign entity, it is going to need to do some additional work.
The approach is straight forward and after all of the debates that have gone back and forth with Home-Host requirements, its great to see a refined way forwards.
