The Mutual Interdependence between Regulation and the Representative Form of Multinational Banks
38 Pages Posted: 23 Jan 2018
Date Written: November 15, 2017
Multinational bank activity is known to generate spillover effects between countries. The size of these spillover effects inter alia depends on the choice of multinational banks' representative form and on regulation. The present paper studies the interdependence between these two factors. We argue that regulators have a preference on representative forms and provide incentives for banks to choose representative forms in their interest by adapting the strictness of regulation. It is shown that competition between national regulators leads to a "race to the top" in regulatory standards. Monitoring levels set by national regulators are larger than efficient monitoring levels. Additionally, a banking-union scenario is considered, where national regulators are in charge of information collection but a central regulator decides on regulation. Monitoring by national regulators decreases if a central regulator is introduced. However, total welfare can still be increased by a further decrease in monitoring levels.
Keywords: regulatory competition, multinational banks, banking union, race to the top, regulatory arbitrage
JEL Classification: G21, G28, D62, F23
Suggested Citation: Suggested Citation