Working Paper Series : Institute for Monetary and Financial Stability
Organizational choices of banks and the effective supervision of transnational financial institutions
- This paper outlines relatively easy to implement reforms for the supervision of
transnational banking-groups in the E.U. that should not be primarily based on legal form
but on the actual risk structures of the pertinent financial institutions. The proposal also
aims at paying close attention to the economics of public administration and international
relations in allocating competences among national and supranational supervisory bodies.
Before detailing the own proposition, this paper looks into the relationship between
sovereign debt and banking crises that drive regulatory reactions to the financial turmoil in
the Euro area. These initiatives inter alia affirm effective prudential supervision as a pivotal
element of crisis prevention.
In order to arrive at a more informed idea, which determinants apart from a perceived
appetite for regulatory arbitrage drive banks’ organizational choices, this paper scrutinizes
the merits of either a branch or subsidiary structure for the cross-border business of
financial institutions. In doing so, it also considers the policy-makers perspective. The analysis
shows that no one size fits all organizational structure is available and concludes that
banks’ choices should generally not be second-guessed, particularly because they are subject
to (some) market discipline.
The analysis proceeds with describing and evaluating how competences in prudential
supervision are currently allocated among national and supranational supervisory authorities.
In order to assess the findings the appraisal adopts insights form the economics of public
administration and international relations. It argues that the supervisory architecture has to
be more aligned with bureaucrats’ incentives and that inefficient requirements to cooperate
and share information should be reduced. Contrary to a widespread perception, shifting responsibility
to a supranational authority cannot solve all the problems identified.
Resting on these foundations, the last part of this paper finally sketches an alternative
solution that dwells on far-reaching mutual recognition of national supervisory regimes
and allocates competences in line with supervisors’ incentives and the risk inherent in crossborder