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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.

Suggested Citation

  • Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers 4148, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4148
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.
    3. Freixas, Xavier & Loranth, Gyongyi & Morrison, Alan D., 2007. "Regulating financial conglomerates," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 479-514, October.
    4. Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
    5. Xavier Freixas & Gyongyi Loranth & Alan D. Morrison & Hyun Song Shin, 2004. "Regulating Financial Conglomerates," Working Paper Research 54, National Bank of Belgium.

    More about this item

    Keywords

    capital adequacy requirements; deposit insurance; multinational bank;

    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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