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Multinational Bank Regulation with Deposit Insurance and Diversification Effects

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  • Lóránth, Gyöngyi
  • Morrison, Alan

Abstract

We analyse a model in which bank deposits are insured and there is an exogenous cost of bank capital. The former effect results in bank over-investment and the latter in under-investment. Regulatory capital requirements introduce investment distortions, which are a constrained optimal response to these market imperfections. We show that capital requirements which are constrained optimal for national banks result in under-investment by multinational banks. The extent of under-investment depends upon the home bank’s riskiness, the extent of international diversification, and the liability structure (branch or subsidiary) of the multinational. Capital requirements for international banks should therefore reflect these effects. We relate our findings to observed features of multinational banks and we discuss the possible existence of a multinational bank channel for financial contagion.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4148.

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Date of creation: Dec 2003
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Handle: RePEc:cpr:ceprdp:4148

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Keywords: capital adequacy requirements; deposit insurance; multinational bank;

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  1. Holthausen, Cornelia & Rønde, Thomas, 2005. "Cooperation in International Banking Supervision," CEPR Discussion Papers 4990, C.E.P.R. Discussion Papers.
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Cited by:
  1. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
  2. Freixas, Xavier & Lóránth, Gyöngyi & Morrison, Alan, 2005. "Regulating Financial Conglomerates," CEPR Discussion Papers 5036, C.E.P.R. Discussion Papers.
  3. Alexis Derviz, 2007. "Cross-Border Risk Transmission by a Multinational Bank," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 87-111, March.
  4. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.

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