DP16893 Voluntary Support and Ring-Fencing in Cross-border Banks

Author(s): Gyöngyi Lóránth, Anatoli Segura, Jing Zeng
Publication Date: January 2022
Date Revised: January 2022
Keyword(s): Multinational bank, ring-fencing, supervisory intervention, supranational supervision, voluntary support
JEL(s): D8, G11, G2
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16893

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.