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Voluntary support and ring-fencing in cross-border banks

Gyoengyi Loranth (), Anatoli Segura () and Jing Zeng
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Gyoengyi Loranth: University of Vienna
Anatoli Segura: Banca d’Italia

No 1373, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study supervisory interventions in cross-border banks under different institutional architectures in a model in which a bank may provide voluntary support to an impaired subsidiary using resources from a healthy subsidiary. While a supranational architecture permits voluntary support, a national architecture gives rise to inefficient ring-fencing of a healthy subsidiary when there is high correlation between the assets of the subsidiaries involved. The enhanced cross-subsidiary support allowed by a supranational architecture affects banks' risk-taking, leading to a convergence of the default risk among cross-border banks with heterogeneous fundamentals. Finally, a supranational architecture reduces the expected deposit insurance costs for banks with riskier fundamentals, but not for safer banks, even in situations in which it improves aggregate welfare.

Keywords: cross-border bank; supervisory intervention; supranational supervision; voluntary support; ring-fencing. (search for similar items in EconPapers)
JEL-codes: D8 G11 G2 (search for similar items in EconPapers)
Date: 2022-06
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