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.

This report argues that policy reforms in micro- and macro-prudential regulation and macroeconomic policies are needed for Europe to reap the important diversification and efficiency benefits from cross-border banking, while reducing the risks stemming from large cross-border banks.Available online as pdf at: http: //www.cepr.org/pubs/books/CEPR/cross-border_banking.pd

Cross-border banking, while having the potential for a more efficient financial sector, also creates potential challenges for bank supervisors and regulators. This volume discusses topics that include: the landscape of cross-border bank activity, the resulting competitive implications, emerging challenges for prudential regulation, and more. Cross-border banking, while having the potential for a more efficient financial sector, also creates potential challenges for bank supervisors and regulators. It requires cooperation by regulatory authorities across jurisdictions and a clear delineation of authority and responsibility. That delineation is typically not present and regulatory authorities often have significantly different incentives to respond when cross-border-active banks encounter difficulties. Most of these issues have only begun to be seriously evaluated. This volume, one of the first attempts to address these issues, brings together experts and regulators from different countries. The wide range of topics discussed include: the current landscape of cross-border bank activity, the resulting competitive implications, emerging challenges for prudential regulation, safety net concerns, failure resolution issues, and the potential future evolution of international banking.

While international policymakers are making good progress on the important work of global resolution and the preparation of recovery and resolution plans, a growing number of supervisors, home as well as hosts, are resorting to territorial approaches. Higher capital ratios, dividend restrictions, restrictions on liquidity flows and even forced subsidiarization are gaining renewed popularity. The objective of these territorial approaches is to protect the interests of the domestic stakeholders of a foreign bank and to limit the effects of cross-border contagion. This type of “ring-fencing” has a negative connotation as it comes at a cost for banks and the efficiency of the overall global financial system. This article addresses the following questions:(1) What makes prudential supervisors more likely to ring-fence?; (2) Do all forms of ring-fencing really deserve this bad reputation?; (3) What are the risks that these measures are addressing and which instruments have been used?; and (4) What are the implications of ring-fencing for the banking group, financial stability in the home and host country, as well as global financial stability?

Territorial bias or home bias refers to the degree of geographical separation of the local operations of a cross border banking group from its foreign parent bank or affiliates to protect the local operations from cross-border contagion. The purpose of this paper is to measure and rank territorial bias in prudential banking regulation and supervision in 22 European Union (EU) and non-EU countries with financial systems predominantly owned by foreign banks. First, a scoring system is developed to measure territorial bias on an individual country basis (vertical analysis). Second, the results are compared across two peer groups, EU and non-EU (horizontal analysis). I find that territorial bias is present to a varying degree in the prudential supervision and the regulations of the countries surveyed. On average higher territorial bias is observed in the non-EU group. Generally, there is also less dispersion in the EU, which can be explained by a more unified regulatory framework and the efforts to achieve supervisory convergence. Non-EU countries also use a wider array of instruments; typically higher capital ratios, mandatory conversion from systemic branches to subsidiaries, stricter local governance requirements, and liquidity restrictions. This is the first analysis and quantification of territorial bias in bank supervision and regulation.

The U.S., the U.K., and more recently, the E.U., have proposed policy measures directly targeting complexity and business structures of banks. Unlike other, price-based reforms (e.g., Basel 3 and G-SIFI surcharges), these proposals have been developed unilaterally with material differences in scope, design and implementation schedules. This may exacerbate cross-border regulatory arbitrage and put a further burden on consolidated supervision and cross-border resolution. This paper provides an analysis of the potential implications of implementing different structural policy measures. It proposes a pragmatic and coordinated approach to development of these policies to reduce risk of regulatory arbitrage and minimize unintended consequences. In doing so, it also aims to identify a set of common policy measures that countries could adopt to re-scope bank business models and corporate structures.

Developing an effective framework for cross-border resolution is a key priority in international regulatory reform. Large bank failures during the global financial crisis brought home the lack of adequate tools for resolving “too-big-to-fail” institutions. In cross-border cases, misaligned incentives and lack of robust mechanisms for resolution and cross-border cooperation left some country authorities with little choice but to take unilateral actions, which contributed to the high fiscal costs of the crisis and resulted in disorderly resolution in some cases