Takeovers of Foreign Banks: A Supervisory Perspective

Rafael Repullo

No 1813, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: This paper investigates the determinants of the takeover of a foreign bank by a domestic bank, whereby the former becomes a branch of the latter, and its welfare effects for both the domestic and the foreign country. The analysis is based on a model of a bank that is supervised by an agency that cares about closure costs plus deposit insurance payouts. The agency uses supervisory information to decide on the early closure of the bank. Under the principle of home country control, the takeover moves responsibility for both supervision of the foreign branch and insurance of the foreign deposits to the domestic country. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign market) and if its investments are riskier than those of the domestic bank. Moreover, the takeover (whenever it happens) is in general welfare improving for both countries.

Date: 2000-08-01
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