know, subsidiaries are locally incorporated and legally independent from their parents. nevertheless, international banks increasingly manage their subsidiaries as if they were branches. they allocate their capital and business lines across the whole group to those areas that offer the most attractive risk / return profile. however, they keep their legal responsibilities limited to the capital invested in each individual unit. the way in which international banks are managed could lead to decisions that are good for the international bank but not necessarily positive for the subsidiary. we can provide some examples to illustrate this. • there is a growing tendency to book some transactions where funding and regulatory costs are lower. although this makes sense from the international banks ’ perspective, it shifts revenues away from the local banks where the business is originated with, among others, obvious fiscal implications. • international banks usually establish individual limits to credit exposure in each foreign country, according to the sensitivity of the overall portfolio. thus, subsidiaries sometimes have to reduce their local exposures, even though these exposures are also financed locally. • international banks are also increasingly inclined to adopt matrix reporting arrangements by which local treasurers, comptrollers, and risk managers report directly to their parent bank ’ s counterparts rather than to the local ceos. bank directors and managers are usually longcareer employees of the parent bank. in some cases local ceos are some sort of ambassadors with few operational responsibilities. this concentration of decision - making powers and rewards at the parent level should be a matter of concern for financial authorities since the parent bank does not have parallel legal responsibilities over their subsidiaries. the basel committee has revised its guidelines on corporate governance in banking organizations. one key area of progress relates precisely to the responsibilities of the subsidiaries ’ board of directors. the basel committee gave the board of subsidiaries a responsibility for the protection of the interest of its depositors. however, it is an open question whether local boards will always have the incentives to proceed as prescribed by the committee, given that they also have to look after the interest of the single shareholder. one potential way to get local managers to look first to the subsidiaries ’ best interest could be to widen the ownership structure of subsidiaries. having minority shareholders would encourage decision taking in the subsidiaries ’ best interest. this leads me to the second challenge i want to discuss : market discipline. ii ) market discipline the need to encourage market discipline as a supplement to the work of supervisors is widely recognized at the international level. however, there are at least three requirements for market discipline to work effectively in

are several factors that explain this phenomenon. • the nature of cross - border banking evolved after the foreign - exchange crises and sovereign defaults of the 1980s. banks are increasingly trying to mitigate transfer and exchange - rate risks by funding their activities in the same location where there are doing business. • technological advances in communications and computing capacity facilitate the fast processing of information to price risks in different sectors and regions. • there is an emphasis on tapping the profitable household sector, which requires a local consumer retail base and thus a “ bricks and mortar ” presence. it is in emerging markets where the growth potential of consumer and mortgage credit lies. • economies of scale and the replication of successful home - grown business lines and products abroad present enormous advantages. • banks need to gain size to prevent unfriendly takeovers. whatever the reason, the presence of foreign banks has been increasing especially in developing countries where on average they now account for 40 % of total bank assets. foreign penetration in banking systems varies largely among countries. foreign banks own more than 80 % of banking assets in mexico, poland, hungary, bulgaria, and estonia, but only 20 % in brazil. more recently, there has been penetration by banks from developing countries in banking systems from other developing countries. according to the world bank, 27 % of developing countries ’ foreign banks are owned by banks established in other developing countries. ii. challenges for emerging economies ’ supervisors there seems to be ample agreement about the benefits of globalization as well as the challenges that this new landscape poses to financial authorities. among the benefits derived from the entry of foreign banks in emerging economies are improvements in efficiency, and the introduction of new products and technologies, as well as a reduction in connected lending practices. in this presentation, i would like to highlight some of the challenges faced by regulators, supervisors, and central banks from emerging economies. in particular, i will refer briefly to the impact of a foreign bank presence with regard to : i ) the soundness of local banks ii ) local market discipline iii ) the impact of foreign regulations on domestic markets iv ) the resolution of troubled global banks, and v ) competition in domestic financial markets. i ) the soundness of local banks the overseas expansion of international banks can take place through the establishment of branches and subsidiaries. i would like to concentrate on the latter since it is the prevailing legal form used by large banks, and it is also the only possibility for a foreign financial institution to establish a presence in the mexican market. as we all