Working Paper: CEPR ID: DP9546
Authors: Thorsten Beck; Wolf Wagner
Abstract: We argue that the extent to which supervision of banks takes place on the supranational level should be guided by two factors: cross-border externalities from bank failures and heterogeneity in bank failure costs. Based on a simple model we show that supranational supervision is more likely to be welfare enhancing when externalities are high and country heterogeneity is low. This suggests that different sets of countries (or regions) should differ in their supranational orientation. We apply the insights of our model to discuss optimal supervisory arrangements for different regions of the world and contrast them with existing arrangements and current policy initiatives.
Keywords: bank regulation; bank resolution; cross-border banking
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cross-border externalities (F55) | supranational bank supervision (F33) |
| heterogeneity in failure costs (D29) | supranational bank supervision (F33) |
| supranational bank supervision (F33) | welfare outcomes (I38) |
| cross-border externalities and low heterogeneity (F12) | welfare outcomes (I38) |
| supervisory structure (L22) | intervention decisions (D70) |
| intermediate form of cooperation (C71) | inefficiencies of national supervision (H54) |