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Deposit Insurance, Capital Regulations, and Financial Contagion in Multinational Banks

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  • Gyöngyi Lóránth
  • Alan D. Morrison
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    Abstract

    Banking sector globalization has caused an expansion in foreign-owned bank assets. In this paper we analyse the effects of a MNB's liability structure upon its investment in a foreign country. We develop a model in which capital adequacy requirements introduce some deliberate underinvestment which counters deposit insurance-induced overinvestment. Diversification is unattractive with fixed bank capital requirements, because it reduces the expected value of the deposit insurance net. This effect applies in multinational banks (MNBs), where shocks to the home country economy alter the value of the deposit insurance net and hence affect overseas lending incentives. Thus, MNBs act as a channel for financial contagion. We discuss the policy implications of our results. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 34 (2007-06)
    Issue (Month): 5-6 ()
    Pages: 917-949

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    Handle: RePEc:bla:jbfnac:v:34:y:2007-06:i:5-6:p:917-949

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    Cited by:
    1. Beck, T.H.L. & Todorov, R.I. & Wagner, W.B., 2011. "Bank Supervision Going Global? A Cost-Benefit Analysis (Replaced by CentER DP 2012-059)," Discussion Paper 2011-127, Tilburg University, Center for Economic Research.
    2. Friederike Niepmann, 2012. "Banking across borders," Staff Reports 576, Federal Reserve Bank of New York.
    3. Calzolari, Giacomo & Lóránth, Gyöngyi, 2004. "Regulation of Multinational banks: A Theoretical Inquiry," CEPR Discussion Papers 4232, C.E.P.R. Discussion Papers.

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