without costs. a possible downside risk is that foreign banks will dominate the domestic banking system. this could have systemic implications during normal times which would amplify in times of crisis. many countries where foreign banks dominate have seen them vigorously acquiring business at the expense of local banks in boom times but retrenching their operations equally vigorously in times of stress. this has been the experience in varying degrees of all emerging economies, including countries like india where foreign banks are present only in the branch mode. 29. post - crisis, we know that mandatory subsidiarization is not a sure fire method of protecting domestic interests since foreign banks facing a crisis at home could very well abandon their subsidiaries. a good illustration of this tendency is what we saw happen in the eu in the wake of the sovereign debt crisis. it was only after very concerted effort that eu could pressurize or persuade foreign banks to maintain support to their eu subsidiaries. even so, credit supply was seriously impaired. 30. on balance, the subsidiary mode has potential advantages over the branch mode both from regulatory and resolution perspectives. however, a number of issues arise : ( i ) should subsidiaries be given full national treatment by virtue of their local incorporation? if not what should be the nature and extent of restrictions? ( ii ) should the subsidiary form of presence be mandated for all new entrants or should it be selectively applied based on certain parameters? and ( iii ) what approach should be adopted towards the existing branches of foreign banks – whether incentives should be provided to them to convert into subsidiaries? these and other related questions will be debated in the discussion paper that the reserve bank expects to put out shortly. fourth issue : why do we need to rewrite laws governing the banking sector? 31. the current statutory arrangement we have is a baffling plethora of laws governing different segments of the banking industry. the nationalized banks are governed by the banking companies ( acquisition and transfer of undertaking ) acts of 1970 and 1980. state bank of india and its subsidiaries are governed by their respective statutes. private sector banks come under the purview of the companies act, 1956 and the banking regulation act, 1949. foreign banks which have registered their documents with the registrar under section 592 of the companies act are also banking companies under the banking regulation act. certain provisions of the banking regulation act have been made applicable to public sector banks. similarly, some provisions of the rbi act too are applicable to nationalized banks, sbi

tax treatment of these instruments – which have now been cleared up – were one of the reasons why german banks were so slow to issue such bonds. in addition, german companies legislation has thus far not explicitly provided for mandatory convertible instruments where the right to convert lies with the issuer. the 2014 draft act amending the companies act, which is currently making its way through the legislative process, will make it legal here in germany, too, to issue coco bonds, which would then convert to equity shares. banks ’ growing need for capital could be precisely the catalyst that might increase the importance of coco bomds in germany, too – which is all the more reason to be careful. attractive as these instruments may be to banks and investors, we must remember that these are very complex capital instruments, especially since they are governed by such disparate areas of the law as companies law, debt law, tax law and supervisory law. there is a risk that retail investors in particular, mesmerised by the relatively high returns on coco bonds, could lose sight of the risks involved. banks are aware of the danger : deutsche bank, for instance, issued its coco bonds in denominations of €100, 000 in order to restrict entry into coco bond business to institutional and professional investors. in the united kingdom, the sale and distribution of coco bonds to retail investors is even prohibited by law. bis central bankers ’ speeches now is the time for supervisors to develop a code of best practices for issuing coco bonds. while taking national legal systems into account, we supervisors need to strive for as much standardisation as possible in order to achieve convergence in the eu. it is important, though, that coco bonds actually be used to absorb the losses that the issuing banks could potentially incur. this challenge has been recognised by eu lawmakers and supervisors. the key tasks facing supervisors now are to observe the market very closely and to press ahead with efforts to improve the legal framework for coco bonds. once these tasks have been accomplished, coco bonds can be a useful addition to banks ’ capital structure. by helping to strengthen the capital base, they will make an added contribution to enhancing banks ’ resilience to future crises. bis central bankers ’ speeches