Bank for International Settlements, 1998, The Maturity, Sectoral and Nationality Distribution of International Bank Lending, (Basle).
Bank for International Settlements, and Organization for Economic Cooperation and Development, 1998, Statistics on External Indebtedness, New Series, No. 20, (January), (Basle).
Basle Committee on Banking Supervision, 1992, Minimum Standards for the Supervision of International Banking Groups and their Cross-Border Establishments, (Basle).
Basle Committee on Banking Supervision, and Offshore Group of Banking Supervisors, 1996, The Supervision of Cross-Border Banking, (Basle).
Blum, Jack A. ,et al, 1998, “Financial Havens, Banking Secrecy and Money Laundering,” Global Programme Against Money Laundering, Office for Drug Control and Crime Preventions (New York: United Nations).
Cassard, Marcel, 1994, “The Role of Offshore Centers in International Financial Intermediation,” IMF Working Paper 94/107 (Washington: International Monetary Fund).
El-Erian, Mohamed A., 1992, “The Regulation and Supervision of Cross-Border Banking,” IMF Departmental Memorandum 92/1 (Washington: International Monetary Fund) (June).
Faraco, Francisco R. J., and Romano Suprani M, 1995, “Analysis Preliminar” in La Crisis Bancaria Venezolana, (Caracas: Editorial Panapo, C.A.)
International Monetary Fund, 1998, International Capital Markets: Development, Prospects, and Key Policy Issues, World Economic and Financial Surveys (Washington).
Kane, Edward, 1998, “Banking Crises and Offshore Financial Regulatory Competition,” Boston College and University of Arizona (mimeo).
Key, Sydney, J., and Scott, Hal S., 1991, International Trade in Banking Services: A Conceptual Framework, Occasional Paper No. 35 (Washington: Group of Thirty).
Lindgren, Carl-Johan, Gillian Garcia, and Matthew I. Saal ,eds., 1996, Bank Soundness and Macroeconomic Policy, (Washington: International Monetary Fund).
Lindgren, Carl-Johan and David Folkerts-Landau, 1998, Toward a Framework for Financial Stability, (Washington: International Monetary Fund).
Lindgren, Carl-Johan and David Folkerts-Landau, 1997, Toward a Framework for Sound Banking, EBS/97/38, (Washington: International Monetary Fund).
Zephirin M.G., and Dave Seerattan, 1997, Financial Innovations in the Caribbean, Caribbean Centre for Monetary Studies, Monograph (Special Studies) Series No. 25, The University of the West Indies, (St. Augustine, Republic of Trinidad and Tobago).
We wish to thank William E. Alexander, Winfrid Blaschke, Warren Coats, Tito Cordelia, Udaibir Das, Claudia Dziobek, Edward Frydl, Sami Geadah, Karl Habermeier, Peter Hayward, Barry Johnston, Eduardo Levy-Yeyati, Philipp Rother, Angel Ubide, and DeLisle Worrell for their helpful comments. Expert research assistance from Jahanara Begum is gratefully acknowledged.
See, for instance, EBS/98/67 (April 10, 1998), BUFF/98/24 (March 5, 1998), the Communiqué of the Interim Committee of the Board of Governors of the IMF (October 4, 1998),
See “Minimum Standards for the Supervision of International Banking Groups and their Cross-Border Establishments,” Basle Committee for Banking Supervision, July 1992.
See “The Supervision of Cross-Border Banking,” report by a Working Group comprised of members of the Basle Committee for Banking Supervision and the Offshore Group of Banking Supervisors, Basle, October 1996.
On average, over the period 1992–97, about 85 percent of offshore center assets (relative to countries reporting to the Bank for International Settlements [BIS]) were bank assets.
Gross flows intermediated by offshore banks residing in a particular country are recorded in that country’s capital account. This, however, does not necessarily imply that these flows seep into the rest of the economy. This depends on whether exchange controls permit transactions between residents and offshore banks. While a country may have external assets and liabilities out of proportion to its current transactions, this does not necessarily imply capital account liberalization, which depends on exchange controls.
See Financial Havens, Banking Secrecy and Money Laundering, U.N. Office for Drug Control and Crime Prevention, Global Programme Against Money Laundering (U.N., 1998).
Booking OFCs include Aruba, the Bahamas, Barbados, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Seychelles, Turks and Caicos, the Marshall Islands, the Netherland Antilles, and Vanuatu.
Eurocurrency markets consist of wholesale book-entry debt contracts, booked outside the country in whose currency they are denominated, and include eurocurrency deposits, eurobonds, euronotes, and eurocommercial paper.
The prominence of the interbank market in offshore banking suggests that a large part of the growth in OTC trading of derivative instruments may have involved offshore banks.
See Doggart (1993).
Nonresident deposits in ACUs are not subject to withholding taxes on interest income. ACUs are also allowed higher foreign exchange position limits. Moreover, Singapore reduced its corporate tax rate from 40 percent to 10 percent to foster offshore activity. See Table 1 for more details.
Data from BIS.
Data from BIS.
See Cassard (1994) for convergence in regulatory frameworks and tax rates in industrialized countries.
The data is based a sub-sample of OFCs reporting to the BIS including The Bahamas, Bahrain, Belgium-Luxembourg, The Cayman Islands, Hong Kong, Singapore, and the UK.
It is assumed that because eurocurrency transactions are short in maturity and denominated in foreign currency, the net cross-border position is a proxy for foreign exchange and liquidity risks.
See the Basle Committee, “Report on the supervision of banks’ foreign establishments,” (Basle: Bank for International Settlements, 1975), and the Basle Committee, “Principles for the supervision of banks’ foreign establishments,” (Basle: Bank for International Settlements, 1983).
“Minimum Standards for the Supervision of International Banking Groups and their Cross-Border Establishments,” Basle Committee for Banking Supervision, July 1992.
“The Supervision of Cross-Border Banking,” report by a Working Group comprised of members of the Basle Committee for Banking Supervision and the Offshore Group of Banking Supervisors, Basle, October 1996.
The 1996 Report recommendations aimed at improving access of home and host supervisors to information necessary for effective consolidated supervision and ensuring that all cross-border banking operations are subject to effective home and host supervision.
This survey was discussed at the International Conference of Bank Supervisors in Sydney, Australia, October 21-23. Unfortunately, at the time of writing, details are not yet available.
The CBSHP recognizes that offshore banks require an adequate legal framework, licensing policy, effective supervision and cooperation with other supervisory agencies. It establishes guidelines requiring that offshore banking legislation specify application criteria, minimum required levels of capital and reserves, supervision by central banks, and external audits.
Given the minimal involvement of an offshore establishment in the economy of the hosting OFC, the main concern of the host supervisors is about a liquidity crisis. This may explain why several OFCs require, as a licensing criterion, that parent banks provide a guarantee of liquidity support should their offshore establishments run into difficulties (see Table 1).
In addition to the supervisory authorities of the OFC and the country where the parent bank resides, the supervisory authorities of the jurisdiction from where the shell branch is managed may be involved.
A similar conclusion is reached in El-Erian (1992) when discussing the adequacy of the 1992 Minimum Standards.
Home supervisors’ attention on offshore establishments’ and parent banks’ liabilities sides is called for especially in cases of suspect criminal activities (such as money laundering) or circumvention of prudential requirements.
Home supervisors should be assured that: (1) the banking group has an appropriate risk management system covering the whole of its global activities; (2) the internal controls and internal audit procedures for controlling the group’s overseas operations are of sufficient quality; (3) changes in ownership and control of any partly owned subsidiary are monitored; (4) the reporting process by which the home supervisors receive information from the head office of the parent bank is reliable; (5) the quality of management is adequate, with “fit and proper” test for individuals where appropriate; (6) the quality of assets and the levels of concentrations are known and are within appropriate parameters; (7) the liquidity of the institution is being monitored and there is no excessive reliance on a single third-party (or a limited number of sources) of funding; and (8) the statutory laws and supervisory regulations of both the host and home countries are being followed.
See 1996 Report (cit.), Annex B.
See 1996 Report (cit.), Annex C.
Members of the Offshore Group are: Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Lebanon, Malta, Mauritius, Netherland Antilles, Panama, Singapore, and Vanuatu.
See Financial Havens, Banking Secrecy and Money Laundering, United Nations Office for Drug Control and Crime Prevention, (Vienna, 1998). Twenty-three criminal cases involving offshore financial companies are also reported.
A judgment needs to be made by home supervisors that the group structure is deliberately set to impede consolidated supervision.
The two samples, drawn from Thomson Bankstat for 1996, consist of about 580 banks in selected OFCs and 3,900 OECD banks—taken to represent onshore banks. Because not all banks in the selected OFCs are exclusively involved in offshore banking, some sampling errors may be possible.
Chart 8 shows the probability density functions (pdf) of offshore banks, normalized by that of onshore banks. It focuses on a range of net income to shareholders’ equity ratios (−50 percent to 30 percent) that captures 90 percent of offshore banks in the sample. For raw probability density functions, see Chart A1 in the Appendix.
Chart 9 is the pdf of offshore banks normalized by that of onshore banks. It focuses on a range of liquid assets to total deposits and borrowed funds ratios (0 percent to 90 percent) that captures 90 percent of offshore banks in the sample. For raw pdfs, see Chart A2 in the Appendix.
Chart 11 is also a ratio of pdfs which focuses on a range of shareholders’ equity to total assets ratios (0 percent to 25 percent) that captures 90 percent of offshore banks in the sample. For raw pdfs, see Chart A3 in the Appendix.
This a non-risk weighted measure of leverage. Unfortunately, data on risk-weighted measures of solvency is not readily available. This issue is addressed at a conceptual level in the following paragraph of this section.
These are wholly owned subsidiaries or partially owned subsidiaries on which onshore parent banks can exert “effective control”.
Assuming that capital account restrictions are effective.
This is a more general point applicable to all capital flows, not just those intermediated through offshore banks.
This section draws from documents prepared by IMF Staff.
See International Capital Markets Report 1998 (Washington: International Monetary Fund) (October).
See International Capital Markets Report 1998 (ibid).
In 1996, of total lending in foreign currency by BIBFs of US $32 billion, the private sector is estimated to have hedged (mainly through forward operations) less than 10 percent.
For foreign BIBFs, inter-office borrowing represented only about one third of their funding.
On a gross basis, total offshore short-term liabilities amounted to US$18.1 billion.
The currency board arrangement required a sound banking system and a greater reliance of monetary policy on reserve requirements.
In the United States, the Federal Reserve has imposed reserve requirements on funds raised offshore when these are on-lent by or transferred from offshore establishments to onshore parent banks.