Local subsidiarization—as is already required or encouraged (through differentiating regulatory treatment compared to branch structure) in some countries<sup>51</sup> —may help alleviate the concerns of the host authorities, albeit at a cost in terms of reduced group-wide efficiency in capital allocation and liquidity management, as well as potentially more fragility in individual parts of the group and less parent support in times of crisis (although the concern about parent support is mitigated by reputational factors). It is important to recognize that the legal form (branch versus subsidiary) in itself may not be a sufficient indication of the real operation: that is, subsidiaries may operate like branches, with key functions centralized at the parent level. There is no definite consensus on the superiority of one legal form over another,<sup>52</sup> although the balance seems to have shifted more toward subsidiarization than before the crisis. Although supervisory cooperation is always important in ensuring that measures to protect domestic interest do not unduly jeopardize financial stability elsewhere, it is important that host supervisors in developing countries assert adequate scrutiny and powers over the presence of foreign banks to address their supervisory concerns, whether through subsidiarization or other ring-fencing measures (for example, asset maintenance requirements) and licensing requirements. More broadly, developing countries‘ perspective on the home-host issue, among other supervisory issues, remains a complicated issue and has been brought into the Group of Twenty (G-20) and FSB agenda.

Lastly, as mentioned, the interaction of alternative measures within the prudential toolkit needs to be considered, as well as the interaction with monetary and fiscal policies. Another aspect is that countercyclical capital buffer is a broad measure that does not differentiate between different exposures and sectors. Some countries may choose to use alternative measures to target issues in a specific sector or supplement such a broad measure using other sectoral measures (as discussed in the next section).

In summary, a countercyclical capital buffer can be a useful macroprudential tool, particularly in increasing the resilience of the financial system. However, the reference guide for systemic risk identification using the credit-to-GDP gap—which is developed using historical data for the BCBS member countries—may not be appropriate for all countries at various stages of development. The BCBS rule already emphasizes the importance of judgment. Many developing countries may find it especially important to focus on the element of national discretion due to different patterns of growth and cycles, stages of financial development, and policy priorities. In

> 51 For example, Russia has a de facto prohibition of foreign branches. China has a differentiating capital requirement for foreign branches, while locally incorporated subsidiaries are subject to the same requirement as domestic banks after the geographic and customer restrictions were removed in 2006 following WTO accession.  New Zealand requires that systemically important foreign entities be organized as subsidiaries and conduct a substantial part of their business locally. After the onset of the crisis, the UK FSA has proposed to increase the power of the host supervisor, possibly by requiring subsidiarization (see FSA 2009a).  The Reserve Bank of India also issued a discussion paper (RBI 2011) expressing views in favor of a subsidiary structure over a branch structure and proposing incentivizing subsidiarization, although the existing laws and regulations already provide a ring-fenced structure with requirements on locally assigned capital.

> 52 For a recent discussion on subsidiarization, see Fiechter and others (2011).

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