And do the authorities themselves have arrangements in place to produce comprehensive assessments of the operations and the risks of these groups? Under the prevailing regulatory structures I am afraid that the answers to both of these questions are likely to be no. Policy actions are needed As I have tried to illustrate so far, financial integration gives rise to several challenges related to the supervision of cross-border banks. Most importantly, I have argued that the present  BIS Review 83/2007  3  supervisory arrangements are not designed to prevent the cross-border externalities that financial crises may result in. This, of course, is a growing problem in an integrated world. Furthermore, I have argued that there are deficiencies in how the supervision of internationally active banks works in practice, which can partly be explained by limitations in legislation and partly by supervisors not being sufficiently coordinated. In my opinion all this gives us good reasons to reflect on how to take actions for revising the present regulatory frameworks. We need to find ways for countries to cooperate closely and establish mechanisms for coordination and conflict resolution. Motives for a coordinated financial supervision Most of what I have said so far is probably pretty uncontroversial both in terms of the analysis of the challenges of integration and of the need for action. However, it may be more difficult to reach agreement on how to move forward. A number of alternative solutions have been brought into the debate.

State supervision according to the global literature has three specific dimensions. i.e., the prudential aspect, conduct of sound business and consumer protection. Prudential supervision promotes the safety and soundness of institutions through their risk management. Conduct of sound business supervision covers fair and orderly conduct of businesses. Consumer protection covers safeguarding interest of consumers. The Central Bank’s supervision mainly covers prudential supervision in three areas, i.e., issues of regulations, examinations and problem resolution. Issues of regulations covers maximum limits on business to limit risks, minimum requirements on risk mitigation instruments such as BIS central bankers’ speeches  3  minimum capital, liquidity, loan loss provisions and governance. Periodical examinations cover the assessment of risk management capacity and early warnings of impending problems to take early remedial actions. Problem resolution covers solution to institutions in crisis or distress such as restructuring, bailing out and liquidation. This supervision has two perspectives at the Micro and Macro levels. Micro supervision means dealing with individual institutions. Macro supervision means actions to protect the system stability. Although the differentiation between the two is barely understood by many, the central banks’ supervisory actions are clearly understood from how central banks have acted in crisis times. The best example is permitting the failure of small ailing institutions and bailing out of systemically important institutions. However, the customers of each ailing institution want the Central Bank to bail them out, despite risky behaviour of both customers and institutions. The Central Bank has no mandate to bail out each such institution and repay their investments.