DP4990 Cooperation in International Banking Supervision

Author(s): Cornelia Holthausen, Thomas Rønde
Publication Date: April 2005
Keyword(s): cheap talk, closure, multinational banks, supervision
JEL(s): F36, G21, G28, L51
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4990

This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ’cheap talk’. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ’type I’ and ’type II’ in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned.