Bankers Without Borders? Implications of Ring-Fencing for European Cross-Border Banks

Yulia Makarova · Anna Ilyina · Christian Schmieder · Eugenio Cerutti

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Banking stability, regulation, efficiency Global Financial Crisis and Policies Global Financial Regulation and Crises

Abstract

This paper presents a stylized analysis of the effects of ring-fencing (i.e., different restrictions on cross-border transfers of excess profits and/or capital between a parent bank and its subsidiaries located in different jurisdictions) on cross-border banks. Using a sample of 25 large European banking groups with subsidiaries in Central, Eastern and Southern Europe (CESE), we analyze the impact of a CESE credit shock on the capital buffers needed by the sample banking groups under different forms of ring-fencing. Our simulations show that under stricter forms of ring-fencing, sample banking groups have substantially larger needs for capital buffers at the parent and/or subsidiary level than under less strict (or in the absence of any) ring-fencing.

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1995Another look at the instrumental variable estimation of error-components models 2008Debt Enforcement around the World 2009Internal capital markets and lending by multinational bank subsidiaries 2007How banks go abroad: Branches or subsidiaries?2010Cross-Border Banking and the International Transmission of Financial Distress During the Crisis of 2007-2008 2007Macroeconomic and Financial Soundness Indicators

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