DP11326 Multinational Banks and Supranational Supervision
We study the supervision of multinational banks (MNBs), allowing for either national or
supranational supervision. National supervision leads to insufficient monitoring of MNBs due
to a coordination problem between supervisors. Supranational supervision solves this problem
and generates more monitoring. However, this increased monitoring can have unintended consequences, as it also affects the choice of foreign representation. Indeed, supranational supervision
encourages MNBs to expand abroad using branches rather than subsidiaries, resulting in more
pressure on their domestic deposit insurance fund. In some cases, it discourages foreign expansion altogether, so that financial integration paradoxically decreases. Our framework has
implications on the design of supervisory arrangements for MNBs, the European Single Supervisory Mechanism being a prominent example.