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Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects

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  • Gyongyi Loranth
  • Alan Morrison

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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.

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Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2003fe11.

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Date of creation: 2003
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Handle: RePEc:sbs:wpsefe:2003fe11

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

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