Voluntary Support and Ring-Fencing in Cross-border Banks

Gyongyi Loranth, Anatoli Segura and Jing Zeng

No 2688, Working Paper Series from European Central Bank

Abstract: We study supervisory interventions in cross-border banks under different institutionalarchitectures in a model in which a bank may provide voluntary support to animpaired subsidiary using resources from a healthy subsidiary. While supranationalarchitecture permits voluntary support, national architecture gives rise to inefficientring-fencing of a healthy subsidiary when there is high correlation between the subsidiaries’assets. The enhanced cross-subsidiary support allowed by a supranational architectureaffects banks’ risk-taking, leading to a convergence of the default risk amongcross-border banks with heterogeneous fundamentals. Finally, supranational architecturereduces the expected deposit insurance costs for banks with riskier fundamentals,but not for safer banks even when it could still be aggregate welfare improving. JEL Classification: D8, G11, G2

Keywords: cross-border bank; ring-fencing; supervisory intervention; supranational supervision; voluntary support (search for similar items in EconPapers)
Date: 2022-07
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Citations: View citations in EconPapers (1)

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Working Paper: Voluntary support and ring-fencing in cross-border banks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222688

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