Remarks
by
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
before the
Institute of International Bankers
Washington, D.C.
March 4, 1996
In 1974, the collapse of Bankhaus Herstatt reminded us that a global system of financial
institutions is only as strong as its weakest component. The failure of Herstatt -- a small bank in
Cologne -- temporarily halted the Clearing House Interbank Payments System (CHIPS). In the
words of Institutional Investor "its failure to meet its obligations to other banks nearly
undermined the entire interbank payments system." Four months later, the closing of the $3.6-
billion-in-assets Franklin National Bank in New York taught us that we could no longer assume
that no large American bank could fail. With those two failures, the American Banker said, "the
fragility of the emerging global market became painfully clear."
By contrast, when Barings Bank failed last year, the global financial markets took note, and
continued to operate smoothly, efficiently, and effectively. No panic in the international
financial community ensued.
The world of 1974 and the world of 1995 were, in many ways, different places. One of the more
significant ways they differed was in the closer consultation among supervisory agencies in
1995. Just as banking supervision on a national level produces confidence against systemic
collapse, international cooperation gives greater global assurance of stability.
The failures of Herstatt and Franklin twenty-two years ago -- the fragility they revealed -- were
two of the events that prompted national banking authorities to create the Basle Committee on
Banking Supervision.
Global markets made cooperation among regulators imperative - - money knew no boundaries -
- and that meant that bank supervisors had to function more effectively across borders. There
was no choice. It was necessary to find common approaches to international supervision over a
range of institutions and national regulatory systems that differed widely. We had to develop
principles such as consolidated supervision and structures such as capital requirements that
by
Ricki Helfer
Chairman
Federal Deposit Insurance Corporation
before the
Institute of International Bankers
Washington, D.C.
March 4, 1996
In 1974, the collapse of Bankhaus Herstatt reminded us that a global system of financial
institutions is only as strong as its weakest component. The failure of Herstatt -- a small bank in
Cologne -- temporarily halted the Clearing House Interbank Payments System (CHIPS). In the
words of Institutional Investor "its failure to meet its obligations to other banks nearly
undermined the entire interbank payments system." Four months later, the closing of the $3.6-
billion-in-assets Franklin National Bank in New York taught us that we could no longer assume
that no large American bank could fail. With those two failures, the American Banker said, "the
fragility of the emerging global market became painfully clear."
By contrast, when Barings Bank failed last year, the global financial markets took note, and
continued to operate smoothly, efficiently, and effectively. No panic in the international
financial community ensued.
The world of 1974 and the world of 1995 were, in many ways, different places. One of the more
significant ways they differed was in the closer consultation among supervisory agencies in
1995. Just as banking supervision on a national level produces confidence against systemic
collapse, international cooperation gives greater global assurance of stability.
The failures of Herstatt and Franklin twenty-two years ago -- the fragility they revealed -- were
two of the events that prompted national banking authorities to create the Basle Committee on
Banking Supervision.
Global markets made cooperation among regulators imperative - - money knew no boundaries -
- and that meant that bank supervisors had to function more effectively across borders. There
was no choice. It was necessary to find common approaches to international supervision over a
range of institutions and national regulatory systems that differed widely. We had to develop
principles such as consolidated supervision and structures such as capital requirements that
would pull the disparate systems into the same sphere. The structure that was built made it less
likely that one irresponsible institution could trigger a systemic meltdown.
Complacence, however, has no place in bank supervision. In a fast-moving world of
telecommunications, financial innovations and capital mobility, we must continually ensure
safeguards, standards, and systems necessary to monitor and contain risks. Todays markets --
and financial institutions -- move quickly.
Given the technical and technological sophistication and orientation of the financial markets, it
is striking how much they -- and international banking supervision -- rest on the human factor.
Neither markets nor supervision would work if the participants did not cooperate. Neither
markets nor supervision would work if the participants did not trust each other.
Sometimes that trust is betrayed.
Last year the Daiwa Bank revealed a loss of more than $1 billion from trading activities in its
New York branch. Later, it revealed a loss of $97 million in its New York trust company during
the mid-1980s.
It soon became clear that despite the success of international bank supervision in maintaining
confidence, there had been a breakdown in the supervisory system. That breakdown arose
from a breach of trust -- a conscious effort over time by senior Daiwa managers to deceive
regulators about the losses. Simple fraud was compounded by collusion, which made the
detection of various fraudulent acts more difficult to discover in bank examinations.
A bank examination is based on the books and records of a bank, statements made to the
examiner by bank officials, and information obtained from other reliable sources. Like a medical
examination, a bank examination is a disciplined look for warning signs. Where warning signs
are concealed, examinations may not find significant problems.
U.S. federal and state regulators ordered Daiwa to terminate operations in the United States
not because our citizens lost money -- none did -- nor because the FDIC insurance fund
sustained losses -- it did not -- nor because Daiwa lost a lot of money from trading activities.
U.S. regulators withdrew the privilege granted Daiwa to operate in the United States because
the bank betrayed our trust.
likely that one irresponsible institution could trigger a systemic meltdown.
Complacence, however, has no place in bank supervision. In a fast-moving world of
telecommunications, financial innovations and capital mobility, we must continually ensure
safeguards, standards, and systems necessary to monitor and contain risks. Todays markets --
and financial institutions -- move quickly.
Given the technical and technological sophistication and orientation of the financial markets, it
is striking how much they -- and international banking supervision -- rest on the human factor.
Neither markets nor supervision would work if the participants did not cooperate. Neither
markets nor supervision would work if the participants did not trust each other.
Sometimes that trust is betrayed.
Last year the Daiwa Bank revealed a loss of more than $1 billion from trading activities in its
New York branch. Later, it revealed a loss of $97 million in its New York trust company during
the mid-1980s.
It soon became clear that despite the success of international bank supervision in maintaining
confidence, there had been a breakdown in the supervisory system. That breakdown arose
from a breach of trust -- a conscious effort over time by senior Daiwa managers to deceive
regulators about the losses. Simple fraud was compounded by collusion, which made the
detection of various fraudulent acts more difficult to discover in bank examinations.
A bank examination is based on the books and records of a bank, statements made to the
examiner by bank officials, and information obtained from other reliable sources. Like a medical
examination, a bank examination is a disciplined look for warning signs. Where warning signs
are concealed, examinations may not find significant problems.
U.S. federal and state regulators ordered Daiwa to terminate operations in the United States
not because our citizens lost money -- none did -- nor because the FDIC insurance fund
sustained losses -- it did not -- nor because Daiwa lost a lot of money from trading activities.
U.S. regulators withdrew the privilege granted Daiwa to operate in the United States because
the bank betrayed our trust.