Deposit Insurance, Capital Regulations, and Financial Contagion in Multinational Banks

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.

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.

Item Type: Article
Keywords: multinational bank; capital adequacy requirements; deposit insurance; financial contagion; finance
Subject(s): Corporate reputation
Finance
Centre: Oxford University Centre for Corporate Reputation
Date Deposited: 12 Dec 2011 14:58
Last Modified: 27 Feb 2017 14:20
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/1680

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