Working Paper: CEPR ID: DP16978
Authors: Thorsten Beck; Consuelo Silva-Buston; Wolf Wagner
Abstract: Banking supervisors frequently cooperate across countries, but cooperation only imperfectly covers the global operations of large banking groups. We show that this causes significant third-country externalities. Using hand-collected supervisory cooperation data, we document that banking groups shift lending activities and risk into third-country subsidiaries when cooperation agreements cover their operations in other countries. The implied country-level increase in the share of foreign loans is 16%. We also show that countries do not internalize third-country effects when making cooperation decisions, resulting in a 26 percentage point higher propensity to cooperate. Overall, our results highlight a need for "cooperating on cooperation."
Keywords: supranational cooperation; cross-border banking; externalities
JEL Codes: G1; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supervisory cooperation (E61) | lending activities (G21) |
| supervisory cooperation (E61) | share of foreign loans (F34) |
| incomplete supervisory cooperation (L14) | risk-shifting into third-country subsidiaries (F23) |
| strength of local oversight (H70) | risk-shifting (H22) |
| risk-shifting (H22) | lending activities (G21) |
| countries' cooperation decisions (F55) | propensity to cooperate (C71) |