Offshore Banking Services
What are the core principles for effective banking supervision?
This is described as by the BCBS as a blueprint for an effective supervisory system. They set a framework of minimum standards for sound supervision practises, although these are voluntary rather than enforced. Countries who are members of the BCBS should implement the Core Principles as part of their banking supervision function.
What is Basel I?
1998 - This is focussed on credit risk management- ensuring that banks do not take on too many risky loans that may not be repaid. It requires cooperation from banks to adhere to a set level of credit risk, otherwise banks who do not follow the standard could gain a competitive advantage.
What is Basel II?
2004 - A revised and extended version of Basel I. It involved a 'three-pillar' approach to ensure banks have strong regulations in place: 1- Maximum requirements for capital, meaning banks have enough money to cover defaults or risky loans. 2- Supervision and review of a bank's internal assessment process, and capital adequacy, to ensure that a bank has policies in place to implement and monitor their levels of capital and risk. 3- Use of disclosure to strengthen market discipline, meaning that banks must provide more information to investors about their capital adequacy so that investors can evaluate the risk for themselves.
What are the preconditions which the Core Principles identify a country as must having for the standards implemented to be effective?
A well developed public infrastructure. Sound macroeconomic policies that are sustainable. Market discipline Policies for crisis management, recovery and resolution A framework to support the creation of new policies for financial stability A public safety net to protect the public in the event of financial crisis.
How do you obtain a banking license?
Because banking directly affects the public who invest money in a bank, it is a regulated activity- which means a banking licence must be obtained in order to legally conduct their activities. These are issued by the regulator, or a financial services commission. Different offshore centres' regulations will have different criteria that a bank must meet in order to obtain a licence, and there may be different levels of licencing allowing certain activities only to be performed. The regulator will undertake a 'fit and proper' assessment of an applicant before granting a licence.
How do banks profit on foreign exchange transactions?
By charging a commission on the exchange rate, and by having different exchange rates for buying and selling foreign currencies. This means that the bank sells foreign currency to the customer at a higher rate than it will buy the same currency from the customer. Foreign exchange rates can have a large effect on business because fluctuations can increase costs and decrease profits unexpectedly.
What are the advantages of being a managed bank for the underlying business?
Enables them to conduct their activities, which they would otherwise not be able to do. Lower costs and greater efficiency as resources are provided by the managing entity Avoids the learning curve required for a new business as the managing entity already has the experience The business can provide non-regulated services whilst the managing entity conducts the banking services. Eventually, the business will have the resources and experience to apply to become a stand-alone bank.
What are the main functions of BCBS?
Enhancing banking stability Encouraging cooperation of banking supervision matters by providing a forum for discussions Setting global standard for banking regulations Strengthening the supervision, regulation and practises of banks around the world.
What s Basel III?
Following the banking crisis of 2008, which was largely triggered by inadequate capital to repay loans, the BCBS introduced enhanced measures to strengthen regulation, supervision and risk management in the banking sector. Basel III sets standards to improve the banking sector's ability to absorb shocks from financial crises, improve risk management, and strengthen banks' transparency and disclosures.
What is the only exception to banking secrecy laws?
If the customer is committing a serious criminal offense. However, in some countries e.g. Switzerland, tax evasion is not considered a crime, and so tax evaders would be covered by the banking secrecy laws. There is an increasing international pressure on secrecy jurisdictions to recognise tax evasion and limit the application of banking secrecy laws.
What is banking offshore?
Offshore banking means having a bank account in an offshore centre, that is different to your own country of residence.
What are the advantages for banks in banking offshore?
Many mainland banks open branches offshore to provide offshore banking services, because: It can compliment or cross-sell to other industries in offshore centres such as trusts and company services, fund services and investment services. Offshore customers often deposit more than they borrow, providing a source of funds for the bank that can be used by mainland branches. Taxation may be lower, meaning higher profits for the branch. Regulation and supervision may be lower, meaning costs of compliance are lower. Costs of premises and staff may be lower.
What is a managed bank?
One that opts to be managed by a registered deposit taker, because it cannot meet the strict criteria to be a licenced bank in it's own right. The managing entity provides the resources for banking activities and performs the operations of the bank on behalf of the business. It is the manager that is subject to the 'fit and proper' assessment. However, the underlying business remains accountable to the regulator and must comply with the regulatory framework.
What are the advantages for banks customers in banking offshore?
People may choose to invest in offshore banks because: Interest may be paid gross (without any withholding tax). Interest may not be taxable in their home country, if they do not remit it. Lower costs for the banks (as above) may allow them to pay higher rates of interest They may be able to benefit from banking secrecy laws
What are banking secrecy laws?
Principles in place in some offshore jurisdictions, which prevent banks from disclosing information about their customers to the authorities. E.g. in Switzerland, there is a maximum penalty of 3 years' imprisonment if an employee discloses a secret entrusted to them as part of their role.
What kind of ongoing supervision will be required to retain a banking licence?
Regular meetings On-site examinations Analysis and review of data provided by the bank Submission of annual, audited financial statements from the bank Approval of any new key employees/persons by the regulator Requirement to notify the regular of any significant events Adherence to the regulator's code of practice as to how banking business should be conducted.
What is BCBS?
The Basel Committee of Banking Supervision- The primary global standard-settler for the regulation of banks. It provides standards, guidelines and statements of best practice, which is expects member countries to implement. The BCBS does not, however, have any legal force or authority to enforce its policies.
What is a foreign exchange contract?
This can be arranged with banks to eliminate the risk for business, because of the uncertainty surrounding foreign currency. The business and the bank agree an exchange rate on the day of the deal, that will be used on an agreed future date to exchange a set amount of currency. This means that the business will know how much money they are selling or receiving in advance. The advantage of this is that if the exchange rates worsen, the business wont have unexpected costs. However, if the exchange rate improves, the business does not benefit from this either.
What is the Group of International Finance Centre Supervisors?
This group was instigated by the BCBS and was formed to bring together authorities that supervise banks in offshore finance centres, and related financial service providers. In order to become a member, an offshore centre must commit to implementing the Basel Committee's Core Principles.
What is a depositor compensation scheme?
This is a form of protection to investors that guarantee they will not lose all of their investment if a bank goes into default. E.g. following the banking crisis in 2008, Jersey and Guernsey guarantee deposits up to £50,000. These schemes normally apply to private individuals and charities only and do not cover corporate accounts, partnerships or trusts. The cost of a depositor compensation scheme is borne by the banking industry of the offshore centre as a whole.
What is the basel capital accord?
This is a specific set of banking regulations (Basel I, Basel II and Basel III) designed to address high-risk areas for banks.
What is a spot transaction?
Where banks buy and sell foreign currency with customers via the foreign exchange (or forex) market real time. Banks can also assist with settlement of foreign currency invoices or hedging against foreign exchange rate variation.