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Who should rescue subsidiaries of multinational banks?

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  • Diemer, Michael

Abstract

This paper asks whether a single resolution authority for multinational banks is desirable. Such an authority was recently established within the European Monetary Union, where the resolution power for large banks was transferred to a Single Resolution Board. To address this issue, we consider the risk incentives of a multinational bank in the presence of different resolution frameworks and determine the welfare-efficient structure which prevents banks from excessive risk-taking. We argue that a single resolution authority is not always welfare-efficient, because it is the heterogeneity of bank resolution power which induces multinational banks to behave prudently. In severe solvency crises, the multinational authority should have the resolution power, whereas in less severe crises national resolution authorities are more efficient in avoiding excessive risk-taking on the part of multinational banks.

Suggested Citation

  • Diemer, Michael, 2016. "Who should rescue subsidiaries of multinational banks?," Journal of Financial Stability, Elsevier, vol. 26(C), pages 159-174.
    • Handle: RePEc:eee:finsta:v:26:y:2016:i:c:p:159-174
    DOI: 10.1016/j.jfs.2016.07.015
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    Cited by:

    1. Ashraf, Badar Nadeem & Arshad, Sidra, 2017. "Foreign bank subsidiaries’ risk-taking behavior: Impact of home and host country national culture," Research in International Business and Finance, Elsevier, vol. 41(C), pages 318-335.

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    More about this item

    Keywords

    Monitoring effort; Multinational bank; Multinational regulator; Moral hazard; Bank bailout;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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