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Takeovers of Foreign Banks: A Supervisory Perspective

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  • Rafael Repullo

    (CEMFI)

Abstract

This paper investigates the determinants of the takeover of a foreign bank by a domestic bank, whereby the former becomes a branch of the latter, and its welfare effects for both the domestic and the foreign country. The analysis is based on a model of a bank that is supervised by an agency that cares about closure costs plus deposit insurance payouts. The agency uses supervisory information to decide on the early closure of the bank. Under the principle of home country control, the takeover moves responsibility for both supervision of the foreign branch and insurance of the foreign deposits to the domestic country. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign market) and if its investments are riskier than those of the domestic bank. Moreover, the takeover (whenever it happens) is in general welfare improving for both countries.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1813.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1813

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  1. Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series 1998-46, Board of Governors of the Federal Reserve System (U.S.).
  2. Rafael Repullo, 2000. "Who should act as lender of last resort? an incomplete contracts model," Proceedings, Federal Reserve Bank of Cleveland, pages 580-610.
  3. Mayes, David & Vesala, Jukka, 1998. "On the Problems of Home Country Control," Research Discussion Papers 20/1998, Bank of Finland.
  4. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  5. Mailath George J. & Mester Loretta J., 1994. "A Positive Analysis of Bank Closure," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 272-299, June.
  6. repec:fth:bfsefi:20/98 is not listed on IDEAS
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