Voluntary Support and Ring-Fencing in Cross-Border Banks
52 Pages Posted: 4 Feb 2022
Date Written: January 1, 2022
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: Suggested Citation