Supervising Cross-Border Banks: Theory, Evidence and Policy
42 Pages Posted: 17 Mar 2012 Last revised: 17 May 2012
Date Written: March 15, 2012
This paper analyzes the distortions that banks' cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. Empirical analysis using bank-level data from the recent crisis provide support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. We discuss several implications for the supervision of cross-border banks in Europe.
Keywords: bank regulation, bank resolution, cross-border banking
JEL Classification: G21, G28
Suggested Citation: Suggested Citation