Regulation of Multinational Banks: A Theoretical Inquiry

This paper examines the prudential supervision of multinational banks. We show why the liability structure between home and foreign units and the division of regulatory tasks among national regulators are crucial to the incentives to monitor bank's activities and to regulatory intervention. Shared liability among the bank's units results in higher incentives for monitoring and intervention than when units are legally separate entities. Cross-border deposit insurance by a single national authority results in lesser incentives to intervene but may improve monitoring as compared with a situation in which regulators only compensate local depositors. We also draw implications on the multinational banks' preferences over the form of representation for foreign units and consider the effects on regulators' behavior on bank's lobbying and international cross-ownership.