Cross-border banking and national supervision – is there a conflict?

by Thorsten Beck, Radomir Todorov and Wolf Wagner

Vox
January 7, 2012

The global crisis has pushed government finances to breaking point. Forced to bailout their domestic banks, they have come to realise some harsh truths in the words: “Banks are international in life and national in death”. This column explores whether a supranational financial supervisor might be able to alleviate the pressures on national regulators and governments, particularly in Europe, and what barriers lie in the way.

The recent crisis has led to a considerable number of interventions in, and resolutions of, failing banks, and we can expect many more in the coming months as the Eurozone crisis in particular continues to undermine bank fragility. The discrepancy between the geographic perimeter of banks – especially large banks’ activities – and regulators’ perimeters has added a further layer of complication, and some have called for a Eurozone-level banking regulation and resolution regime (Saurez 2011).

For example, the resolution of Fortis at the national level - undertaken separately by Dutch, Belgian, and Luxembourg authorities - has confirmed Charles Goodhart’s and Mervyn King’s point that "banks are international in life and national in death". The failure of the Icelandic banks, with wide-ranging economic and political repercussions, has shed doubts on the viability of large multinational banks in small countries.

Ideally, authorities should only intervene in a bank when the expected costs of doing so are less than the expected benefits. The expected survival likelihood – which largely determines the benefits – should be reflected in the CDS spread, which is the expected loss on the underlying asset. Yet, when we look at a sample of 54 banks that were the subject of government interventions in 2008 or 2009, we observe a significant dispersion across banks and countries (see Beck et al. 2011). This casts doubt on the above statement.

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