Supervising cross-border banks: theory, evidence and policy

Abstract

This paper analyses the distortions that banks' cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. Empirical analysis using bank-level data from the recent crisis provides support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. We discuss several implications for the supervision of cross-border banks in Europe.

Cyprus: from boom to bail-in

“…Effective regulation of global banks, across different regulatory cultures, with regulators placing differential attention to each bank, with different levels of conservatism, can become a very challenging task. Beck et al (2013) offer evidence consistent with this interpretation: the incentives of a domestic regulator might be affected by the structure of the cross-border bank's balance sheet, while domestic political calculations in the absence of a resolution law might further complicate the picture.…”

Financial Globalisation and the Crisis

“…This coordinated approach solved the " race to the exit" problem by which individual parent banks might fail to internalise the systemic impact of pulling funding from affiliates in host countries, especially those host countries in which foreign-owned banks were the bedrock of the local financial system. While such a coordinated approach might have been effective in forestalling a panic-driven suboptimal equilibrium during the most intense phase of the crisis, it does not remove the underlying tensions between home and host countries in relation to the relative financial health of parent banks and affiliate banks and differing regulatory incentives (see also Beck et al 2012).…”

Optimal Supervisory Architecture and Financial Integration in a Banking Union

“…My modeling of supervision is close to Calzolari and Loranth (2011), who focus on the impact of the legal form of a multinational bank, and Mailath and Mester (1994). Beck, Todorov, and Wagner (2013) show that the predictions on supervisory forbearance of this modeling approach are supported by European data and discuss the implications for the European banking union. Another related paper is Holthausen and Ronde (2004), who study how different national supervisors of multinational banks can voluntarily exchange information despite their conflicting objectives.…”

“…As shown in 4, this dimension typically depends on the impact of a bank's default on non-local agents, Beck, Todorov, and Wagner (2013) provide such estimates for the European case.…”