Risk-based capital standards presume a need for common capital standards
across countries. The details of forging an agreement were left to the
staffs of the primary bank regulators in each country, and compromises
were inevitable. Although domestic constituencies' reactions to the
proposals were invited, the arduous negotiations that led to the
proposals generated intense pressure on the principals not to make
changes. The European Community's approach to financial integration
seems to be driven by a political desire to achieve an integrated market
within Europe, despite significant institution al differences among
countries. Underlying that desire is a belief that the market pressures
that result from different regulatory systems operating in the same
market will produce the right answer . The financial provisions of the U
.S.-Canada free-trade agreement take a direction that, in my judgment,
is more productive. The provisions are more limited in scope than are
those of the European initiative. National treatment and national
sovereignty are preserved. However, the delicate issue of national
responsibility for failing institutions, and its relationship to
monetary policies, is not addressed. A Better Alternative A productive
basis for international regulation can be formulated around three
principles: 1. free entry for foreign-owned subsidiaries chartered under
the laws of the host country; 2. national treatment for those
subsidiaries; and 3. national responsibility for (a) monetary policy,
(b) prevention of unwarranted financial panics in domestically chartered
institutions, whether foreign or domestically owned, and (c) supervision
of all domestically chartered institutions, regardless of ownership.
