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Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects

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  • Gyongyi Loranth
  • Alan Morrison

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

  • Gyongyi Loranth & Alan Morrison, 2003. "Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects," OFRC Working Papers Series 2003fe11, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2003fe11
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2003fe11.pdf
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    Cited by:

    1. repec:zbw:bofrdp:2007_012 is not listed on IDEAS
    2. Florian Buck & Eva Schliephake, 2012. "The Regulator's Trade-off: Bank Supervision vs. Minimum Capital," CESifo Working Paper Series 3923, CESifo.
    3. Buck, Florian & Schliephake, Eva, 2012. "Political Economy of Banking Regulation," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62018, Verein für Socialpolitik / German Economic Association.
    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. 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.
    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.
    8. Xavier Freixas & Gyongyi Loranth & Alan D. Morrison & Hyun Song Shin, 2004. "Regulating Financial Conglomerates," Working Paper Research 54, National Bank of Belgium.
    9. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," PSE Working Papers halshs-00703738, HAL.
    10. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.
    11. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.

    More about this item

    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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