Voluntary Support and Ring-Fencing in Cross-Border Banks

52 Pages Posted: 4 Feb 2022

See all articles by Gyongyi Loranth

Gyongyi Loranth

University of Vienna; Centre for Economic Policy Research (CEPR)

Anatoli Segura Velez

Bank of Italy

Jing Zeng

University of Bonn

Date Written: January 1, 2022

Abstract

We study supervisory interventions in cross-border banks under different institutional architectures in a model in which a bank may provide voluntary support to an impaired subsidiary using resources in a healthy subsidiary. While a supranational architecture permits voluntary support, a national architecture gives rise to inefficient ring-fencing of a healthy subsidiary when there is high correlation between the subsidiaries' assets. The enhanced cross-subsidiary support allowed by a supranational architecture affects banks' risk-taking, leading to a convergence of the subsidiary risk of banks with heterogeneous fundamentals. Finally, the objective to minimize national expected deposit insurance costs is achieved through a supranational architecture for riskier banks, but not so for safer banks even in situations in which it would be aggregate welfare improving.

Keywords: Multinational bank, ring-fencing, supervisory intervention, supranational supervision, voluntary support

JEL Classification: D8, G11, G2

Suggested Citation

Loranth, Gyongyi and Segura Velez, Anatoli and Zeng, Jing, Voluntary Support and Ring-Fencing in Cross-Border Banks (January 1, 2022). CEPR Discussion Paper No. DP16893, Available at SSRN: https://ssrn.com/abstract=4026780

Gyongyi Loranth (Contact Author)

University of Vienna ( email )

Vienna

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anatoli Segura Velez

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jing Zeng

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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