Out of Sight, Out of Mind? On the Risk of Sub-Custodian Structures

23 Pages Posted: 21 Jun 2016

See all articles by Thomas Bernhard Droll

Thomas Bernhard Droll

Deutsche Bundesbank

Natalia Podlich

Deutsche Bundesbank

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision

Date Written: 2015

Abstract

We analyse sub-custodian chains using a unique data set from a survey. Our key question is whether there is any evidence for moral hazard in the delegation of asset safe-keeping to sub-custodians. Sub-custodian chains can be relatively long and frequently reach across several countries. The risk that securities are lost or the return to their owners delayed is not negligible. Our findings highlight that foreign or better informed banks have shorter sub-custodian chains. Better capitalised banks have longer, but less risky sub-custodian chains. Our findings support the view that Central Securities Depositories (CSDs) play a beneficial role in the management of sub-custodian structures, since chains where a CSD is the first sub-custodian reduce the country risk in sub-custodian structures. When we analyse the choice of a CSD as first sub-custodian, we find that better capitalised, larger and foreign banks are less likely to rely on CSDs as their first sub-custodian.

Keywords: Custodian Banks, UCITS funds, Moral Hazard

JEL Classification: G14, G21, G28

Suggested Citation

Droll, Thomas Bernhard and Podlich, Natalia and Wedow, Michael, Out of Sight, Out of Mind? On the Risk of Sub-Custodian Structures (2015). Bundesbank Discussion Paper No. 31/2015. Available at SSRN: https://ssrn.com/abstract=2797055

Thomas Bernhard Droll (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Natalia Podlich

Deutsche Bundesbank ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision ( email )

Frankfurt a.M.
Germany

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