Loranth, Gyöngyi and Morrison, Alan (2007) Deposit Insurance, Capital Regulations, and Financial Contagion in Multinational Banks. Journal of Business Finance & Accounting, 34 (5-6). pp. 917-949.
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.
|Keywords:||multinational bank; capital adequacy requirements; deposit insurance; financial contagion|
|Centre:||Oxford University Centre for Corporate Reputation
Faculty of Finance
|Date Deposited:||12 Dec 2011 14:58|
|Last Modified:||23 Oct 2015 14:06|
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