Voluntary Support and Ring-Fencing in Cross-Border Banks

59 Pages Posted: 6 Jul 2022

See all articles by Gyongyi Loranth

Gyongyi Loranth

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

Anatoli Segura

Bank of Italy

Jing Zeng

University of Bonn

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 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 from 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 assets of the subsidiaries involved. The enhanced cross-subsidiary support allowed by a supranational architecture affects banks' risk-taking, leading to a convergence of the default risk among cross-border banks with heterogeneous fundamentals. Finally, a supranational architecture reduces the expected deposit insurance costs for banks with riskier fundamentals, but not for safer banks, even in situations in which it improves aggregate welfare.

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

JEL Classification: D8, G11, G2

Suggested Citation

Loranth, Gyongyi and Segura, Anatoli and Zeng, Jing, Voluntary Support and Ring-Fencing in Cross-Border Banks (June 22, 2022). Bank of Italy Temi di Discussione (Working Paper) No. 1373, Available at SSRN: https://ssrn.com/abstract=4154467 or http://dx.doi.org/10.2139/ssrn.4154467

Gyongyi Loranth

University of Vienna ( email )


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Jing Zeng

University of Bonn ( email )

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

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