Deposit Insurance, Capital Regulations, and Financial Contagion in Multinational Banks |
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| Authors: | Gyö ngyi,Ló rá nth Alan D.,Morrison |
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| Affiliation: | The authors are respectively from the Judge Institute of Management, University of Cambridge and CEPR;and the Saïd Business School, University of Oxford and CEPR. An earlier version of this paper was circulated with the title 'Multinational Bank Capital Regulation with Deposit Insurance and Diversification Effects.' |
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| Abstract: | Abstract: Banking sector globalization has caused an expansion in foreign-owned bank assets. In this paper we analyse the effects of a MNB's liability structure upon its investment in a foreign country. We develop a model in which capital adequacy requirements introduce some deliberate underinvestment which counters deposit insurance-induced overinvestment. Diversification is unattractive with fixed bank capital requirements, because it reduces the expected value of the deposit insurance net. This effect applies in multinational banks (MNBs), where shocks to the home country economy alter the value of the deposit insurance net and hence affect overseas lending incentives. Thus, MNBs act as a channel for financial contagion. We discuss the policy implications of our results. |
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| Keywords: | multinational bank capital adequacy requirements deposit insurance financial contagion |
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