- 28 July 2022
- WORKING PAPER SERIES - No. 2688Details
- We study supervisory interventions in cross-border banks under different institutionalarchitectures in a model in which a bank may provide voluntary support to animpaired subsidiary using resources from a healthy subsidiary. While supranationalarchitecture permits voluntary support, national architecture gives rise to inefficientring-fencing of a healthy subsidiary when there is high correlation between the subsidiaries’assets. The enhanced cross-subsidiary support allowed by a supranational architectureaffects banks’ risk-taking, leading to a convergence of the default risk amongcross-border banks with heterogeneous fundamentals. Finally, supranational architecturereduces the expected deposit insurance costs for banks with riskier fundamentals,but not for safer banks even when it could still be aggregate welfare improving.
- JEL Code
- D8 : Microeconomics→Information, Knowledge, and Uncertainty
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G2 : Financial Economics→Financial Institutions and Services