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Voluntary Support and Ring-Fencing in Cross-border Banks

Gyöngyi Lóránth, Anatoli Segura and Jing Zeng

No 16893, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 in 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 subsidiaries' assets. The enhanced cross-subsidiary support allowed by a supranational architecture affects banks' risk-taking, leading to a convergence of the subsidiary risk of banks with heterogeneous fundamentals. Finally, the objective to minimize national expected deposit insurance costs is achieved through a supranational architecture for riskier banks, but not so for safer banks even in situations in which it would be aggregate welfare improving.

Keywords: Multinational bank; ring-fencing; supervisory intervention; supranational supervision; voluntary support (search for similar items in EconPapers)
JEL-codes: D8 G11 G2 (search for similar items in EconPapers)
Date: 2022-01
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