Similarly, economic or financial problems in host countries could affect the parent bank if a subsidiary’s operations are relatively large compared with those of the rest of the group. As pan-African banks have grown in reach and complexity, supervision gaps have emerged. It is difficult for home country regulators to determine the soundness of a subsidiary or the potential risks it faces without some grasp of the structure and operations of the bank group as a whole. This calls for a consolidated supervisory approach for the entire group led by the home regulator in collaboration with host country regulators. Bank-group-specific supervisory colleges, backed by memorandums of understanding regarding systematic exchange of supervisory information, are important to this effort. The expansion of pan-African banks has produced a network of systemically important banks (see Chart 3)—that is, institutions whose failure could have broad financial consequences—which heightens the need for strong African home country regulatory leadership.
Supervisory capacity is already constrained and underresourced in most of Africa, and cross-border banks put additional pressure on home supervisors to ensure that these groups are adequately supervised. The recent global financial crisis made it clear that cross-border cooperation on supervision and resolution is essential to handling risks to financial stability, and inadequate cross-border cooperation can have serious repercussions. If there is no effective cooperation and planning of cross-border bank resolution, tools employed to resolve cross-border institutions tend to be last-minute, ad-hoc interventions that involve public support. Even long-standing relationships between supervisory authorities can break down in a crisis.
Home and host supervisors’ mismatched interests are exacerbated by the considerable difference in the size of institutions and economies and are serious impediments to cross-border cooperation. Some subsidiaries of pan-African banks are systemically important in their host countries, but they may represent only a small portion of the overall operations of the parent banking group. This can have implications for financial stability in host jurisdictions if home authorities or parent institutions take unilateral action—for example, putting restraints on the home country institution to recapitalize a foreign subsidiary (that is, ring-fencing). The greater the asymmetry in economic size between home and host, all else equal, the less likely a financial institution’s overall strategy will specifically take into account the host country’s needs and the greater the threat to financial stability in the host country if problems emerge at home. In Europe, for example, western European banks cut back lending to eastern Europe during the global financial crisis—a relatively small move in the West with serious implications in the East. The Vienna Initiative in 2009 and 2011 was a response to promote closer coordination to safeguard financial stability and take into account systemic risk concerns in emerging Europe.
To ensure that the gains from African cross-border banking networks are sustained, the pan-African bank phenomenon must include upgraded consolidated supervision buttressed by enhanced cross-border cooperation. International best practices call for a consolidated view of owner operations and risks faced by banking groups, which typically involves establishment of individual supervisory colleges and continuous exchange of information that are outlined in memorandums of understanding between regulators and supervisors. This cooperative framework must be established in quiet times rather than when a crisis occurs.
The spread of pan-African banks increases vulnerability to, and the strength of, spillovers of financial problems across African countries. Without understandings on how the problems of a troubled bank would be resolved, supervision alone may have limited effectiveness. Individual regulators may revert to ring-fencing during a crisis, with less than optimal results. The global financial crisis demonstrated that a lack of workable cross-border operational frameworks extracts a high cost—and drove home just how difficult it is to construct those frameworks.
Regulatory and accounting norms across Africa must be upgraded to international standards to improve transparency and foster integration. In pursuing these reforms, international institutions such as the IMF can play a useful role in continuing to provide extensive technical assistance.
Alexandra Born is an economist and Paul Mathieu is an advisor, both in the IMF’s Monetary and Capital Markets Department. This article was originally published in Finance & Development, the IMF’s quarterly magazine.
