Abstract
The Basle Committee on Banking Supervision was set up in 1974 in direct response to a number of problem situations in international banking. For example, the failure of the Franklin National Bank in the United States marked, for the first time, a situation in which U.S. regulators had to coordinate the closing of a bank with an institution overseas, the Bank of England, since the Franklin National Bank had an overseas presence in London.1 Also, there was the situation of Bank Herstatt, a German bank that believed it could become more profitable by speculating in foreign exchange markets than by conducting the basic business of banking.2 The bank eventually got into so much difficulty that the German regulatory authorities had to close the institution. However, they did so in the middle of the business day, which ended up causing substantial losses for foreign banks on opposite ends of the foreign exchange contract. This occurred because in the United States, for example, banks had remitted their end of the contract in the morning and were waiting to receive instructions in the afternoon about where the counterparty funds were placed. In another U.S. case concerning the San Diego National Bank, the Federal Deposit Insurance Corporation elected not to pay some standby letters of credit that were, in essence, performance guarantees.3 Together these situations raised concerns, and the Group of Ten’s central bank governors thought that someone ought to look more carefully at the conduct of banking business in the international arena.
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