Offshore Banking: An Analysis of Micro- and Macro-Prudential Issues

IMF Working Papers, January 1, 1999

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Offshore Banking: An Analysis of Micro- and Macro-Prudential Issues

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Bibliographic details

• Authors: Luca Errico, Alberto Musalem Borrero
• Published: January 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451842166.001

Summary

• The paper examines offshore banking as a pervasive practice that has played a role in recent crises.
• Offshore banking is an increasingly attractive alternative to the sometimes heavily regulated financial markets of emerging economies.
• From a microeconomic vantage point, offshore banks appear to exploit the risk-return tradeoff by being more profitable than onshore banks, and in many instances also more leveraged.
• Risks stemming from offshore activities may be easily transmitted onshore with systemic consequences.
• Current prudential and supervisory frameworks are broadly adequate for risk management if effectively and universally implemented.

Microeconomic findings

• Offshore banks seem to exploit the risk-return tradeoff by being more profitable than onshore banks.
• In many instances offshore banks are also more leveraged.
• The combination of higher profitability and higher leverage implies concentrated risk-taking incentives at the institution level.

Macroprudential findings

• Risks originating in offshore activities can be transmitted onshore with systemic consequences.
• The cross-border nature of offshore banking complicates containment and crisis management at the national level.
• Effective and universal implementation of prudential and supervisory frameworks is essential to manage aggregate risks.

Policy implications and recommendations

• Ensure effective implementation of existing prudential and supervisory frameworks across jurisdictions.
• Promote universal application of supervisory standards to reduce risk transmission from offshore to onshore banking systems.
• Focus on cross-border coordination to address systemic vulnerabilities arising from offshore banking activities.

Content in this bundle

• Offshore Banking: An Analysis of Micro- and Prudential Issues - WP/99/05
  • Offshore Banking: An Analysis of Micro- and Prudential Issues - WP/99/05 (Markdown version)
  • Offshore Banking: An Analysis of Micro- and Prudential Issues - WP/99/05 (PDF)