How does the international dimension of network banking potentially affect supervision and regulation?
Existing regulations for retail banking, deposit insurance, and lender-of-last-resort facilities are designed to deal with domestic or branches of foreign retail banks with domestic depositors. In the first section of this paper we concluded that a customer’s marginal costs of buying financial services are independent of the network bank’s physical location. Thus, in the absence of legal restrictions, network banks could attract a large number of foreign customers, giving rise to the following issues for supervision and regulation: • For many types of cross-border financial services, it is unclear which nations’ regulations would apply, leaving unresolved and nebulous legal issues regarding network banking. • Regulatory regimes of different countries compete with each other. Restrictive regulations hurt local financial institutions, and they lose business to financial intermediaries elsewhere. Thus, “soft” countries can attract foreign customers. The retail sector has so far been less
