Regulation of Banking Groups

Thomas Harr and Thomas Rønde
Additional contact information
Thomas Harr: Danske Bank Group
Thomas Rønde: Department of Economics, University of Copenhagen

No 2006/01, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: We study the optimal regulation of banking groups (“banks”), taking both minimum capital requirements and legal structure into account. A bank can set up either as one legal unit facing limited liability jointly (branch structure) or as a bank holding company with subsidiaries (subsidiary structure). Banks are exposed to risk from their unobservable asset choices and to exogenous risk from their environment. We show that banks with branches are more prudent in normal times than banks with subsidiaries, but are also less prudent when problems arise. A regulator that observes banks’ exogenous risk should optimally determine both capital requirements and legal structure. If the exogenous risk is private information to banks, it can be optimal to screen banks according to risk by setting capital requirements appropriately, and letting banks choose their legal structure.

Keywords: banking groups; capital requirements; legal structure (search for similar items in EconPapers)
JEL-codes: G21 G28 L51 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-01
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
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Citations: View citations in EconPapers (5)

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