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Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects

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  • Alan Morrison
  • Gyongyi Loranth

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 overinvestment and the latter in underinvestment. 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 underinvestment by multinational banks. The extent of underinvestment 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.

Suggested Citation

  • Alan Morrison & Gyongyi Loranth, 2003. "Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects," Economics Series Working Papers 2003-FE-11, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:2003-fe-11
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    File URL: https://ora.ox.ac.uk/objects/uuid:6a2f3922-2fca-473f-a69e-ad41a82cbc4d
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    Cited by:

    1. repec:zbw:bofrdp:2007_012 is not listed on IDEAS
    2. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," PSE Working Papers halshs-00703738, HAL.
    3. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.
    4. Freixas, Xavier & Loranth, Gyongyi & Morrison, Alan D., 2007. "Regulating financial conglomerates," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 479-514, October.
    5. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
    6. Holopainen, Helena, 2007. "Integration of financial supervision," Bank of Finland Research Discussion Papers 12/2007, Bank of Finland.
    7. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," Working Papers halshs-00703738, HAL.

    More about this item

    Keywords

    Capital adequacy requirements; deposit insurance; multinati;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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