Working Paper: CEPR ID: DP16893
Authors: Gyongyi Loranth; Jing Zeng; Anatoli Segura
Abstract: We study the effects of the introduction of a supranational authority responsible for common deposit insurance in a model of cross-border banks with both endogenous risk-taking and within-group risk-sharing possibilities. With national deposit insurance, local authorities inefficiently ring-fence resources flowing from healthy to impaired subsidiaries for high asset correlation. The anticipation of ring-fencing discourages cross-border bank integration. Common deposit insurance removes ring-fencing and encourages cross-border integration, but has an ambiguous impact on the banks' risk-taking incentives.Overall, common deposit insurance increases welfare when banks are sufficiently risky, but otherwise can lead to excessive cross-border integration and lower welfare.
Keywords: Multinational bank; Supervisory intervention; Supranational supervision; Voluntary support; Ringfencing
JEL Codes: D8; G11; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national architecture (N60) | ringfencing (G28) |
| high correlation between subsidiaries' assets (G32) | ringfencing (G28) |
| ringfencing (G28) | costly external capital raising (G24) |
| ringfencing (G28) | inefficient liquidation of impaired unit (G33) |
| supranational architecture (F55) | elimination of ringfencing (G33) |
| elimination of ringfencing (G33) | convergence of subsidiary risk (G33) |
| supranational architecture (F55) | efficiency of risk management in banks (G21) |
| supranational architecture (F55) | expected deposit insurance costs for riskier banks (G28) |
| anticipation of ringfencing (G32) | cross-border banks' risk-taking incentives (F65) |