Working Paper: CEPR ID: DP4990
Authors: Cornelia Holthausen; Thomas Rønde
Abstract: This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ?cheap talk?. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ?type I? and ?type II? in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned.
Keywords: Cheap Talk; Closure; Multinational Banks; Supervision
JEL Codes: F36; G21; G28; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supervisors' interests alignment (G34) | welfare outcomes of closure decisions (J65) |
| asymmetry of information (D82) | Type I errors and Type II errors (C12) |
| national interests alignment (F52) | regulatory outcomes (K20) |
| bank's strategic allocation of investments (G11) | closure decisions (G33) |
| supranational supervisor presence (G28) | better regulatory outcomes (G18) |