Organizational Choices of Banks and the Effective Supervision of Transnational Financial Institutions

46 Pages Posted: 19 Jul 2012 Last revised: 15 May 2013

See all articles by Tobias H. Troeger

Tobias H. Troeger

Goethe University Frankfurt - Research Center SAFE; European Corporate Governance Institute (ECGI); European Banking Institute

Date Written: March 21, 2013

Abstract

This paper outlines relatively easy to implement reforms for the supervision of transnational banking-groups in the E.U. that should not be primarily based on legal form but on the actual risk structures of the pertinent financial institutions. The proposal also aims at paying close attention to the economics of public administration and international relations in allocating competences among national and supranational supervisory bodies.

Before detailing the own proposition, this paper looks into the relationship between sovereign debt and banking crises that drive regulatory reactions to the financial turmoil in the Euro area. These initiatives inter alia affirm effective prudential supervision as a pivotal element of crisis prevention.

In order to arrive at a more informed idea, which determinants apart from a per-ceived appetite for regulatory arbitrage drive banks’ organizational choices, this paper scrutinizes the merits of either a branch or subsidiary structure for the cross-border business of financial institutions. In doing so, it also considers the policy-makers perspective. The analysis shows that no one size fits all organizational structure is available and concludes that banks’ choices should generally not be second-guessed, particularly because they are subject to (some) market discipline.

The analysis proceeds with describing and evaluating how competences in prudential supervision are currently allocated among national and supranational supervisory authorities. In order to assess the findings the appraisal adopts insights form the economics of public administration and international relations. It argues that the supervisory architecture has to be more aligned with bureaucrats’ incentives and that inefficient requirements to cooperate and share information should be reduced. The evolving Single Supervisory Mechanism for euro area banks with its rather complicated allocation of responsibilities between the ECB and the national supervisors in participating and non-participating Member States will not solve all the problems identified as it is partly in disaccord with bureaucrats’ incentives.

The last part of this paper finally sketches an alternative solution that dwells on far-reaching mutual recognition of national supervisory regimes and allocates competences in line with supervisors’ incentives and the risk inherent in cross-border banking groups.

Keywords: cross-border banking, prudential supervision, consolidating supervision, banking union, subsidiaries, branches, Single Supervisory Mechanism (SSM), European Central Bank (ECB)

JEL Classification: G21, G28, H77, K22, K23, L22

Suggested Citation

Tröger, Tobias Hans, Organizational Choices of Banks and the Effective Supervision of Transnational Financial Institutions (March 21, 2013). Texas International Law Journal, Vol. 48, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2111979

Tobias Hans Tröger (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/researchers-details/showauthor/prof-dr-tobias-troe

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

European Banking Institute ( email )

Frankfurt
Germany

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