Discussion Paper Details

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Title: Is the Financial Safety Net a Barrier to Cross-Border Banking?

Author(s): Ata Can Bertay, Asli Demirguc-Kunt and Harry Huizinga

Publication Date: December 2011

Keyword(s): Bank bailouts, Cross-border banking and International burden sharing

Programme Area(s): Public Economics

Abstract: A bank?s interest expenses are found to increase with its degree of internationalization as proxied by its share of foreign liabilities in total liabilities or a Herfindahl index of international liability concentration, especially if the bank is performing badly. Our benchmark estimation suggests that an international bank?s cost of funds raised through a foreign subsidiary is between 1.5% and 2.4% higher than the cost of funds for a purely domestic bank, which is a sizeable difference given an overall mean cost of funds of 3.3%. These results are consistent with limited incentives for national authorities to bail out an international bank, but also with an international bank recovery and resolution process that is inefficient. In any event, the operation of the financial safety net appears to be a barrier to cross-border banking.

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Bibliographic Reference

Bertay, A, Demirguc-Kunt, A and Huizinga, H. 2011. 'Is the Financial Safety Net a Barrier to Cross-Border Banking?'. London, Centre for Economic Policy Research.