Organizational Choices of Banks and the Effective Supervision of Transnational Financial Institutions

By Tröger, Tobias H. | Texas International Law Journal, Spring 2013 | Go to article overview

Organizational Choices of Banks and the Effective Supervision of Transnational Financial Institutions


Tröger, Tobias H., Texas International Law Journal


SUMMARY

I. TRANSNATIONAL CHALLENGES IN BANKING REGULATION AND SUPERVISION .......... 178

A. The Regulatory Challenges Associated with Integrated Cross-Border Banking Groups .......... 178

B. Intra-Group Restructurings as a Sign of Regulatory Arbitrage? .......... 182

1. Europe .......... 182

2. United States .......... 183

C. Misconceptions and the Pivotal Question .......... 184

II. THE IMPORTANCE OF MICRO-PRUDENTIAL SUPERVISION: LESSONS FROM THE ONGOING SOVEREIGN DEBT AND BANKING CRISES IN THE EURO AREA .......... 186

A. Sovereign Debt and Banking Crises Through the Ages .......... 187

1. Historical Anecdotes .......... 187

2. Bailout Rationality and Moral Hazard .......... 187

B. The Contemporary European Angle and One Regulatory Response .......... 190

1. Confidence Crisis July 2011 .......... 190

2. Micro-Prudential Regulatory Reactions .......... 191

III. ORGANIZATIONAL CHOICES OF BANKS .......... 193

A. Branches and Subsidiaries: Main Features of Prototypical Organizational Structures .......... 193

B. The Bank's Perspective .......... 194

1. General Considerations .......... 194

2. Assets and Drawbacks Depending on the Bank's Business Model .......... 195

3. Business Judgment and Market Reactions .......... 196

C. The Policymaker's Perspective .......... 197

D. The Regulatory Arbitrage Debate Revisited .......... 199

IV. THE SUPERVISORY REGIME FOR E.U. CROSS-BORDER BANKING GROUPS .......... 200

A. General Determinants .......... 201

B. The E. U. Architecture of Micro-Prudential Banking Supervision .......... 202

1. Supervision of Business Entities .......... 202

a. Subsidiaries .......... 202

b. Branches (E.U. Passport) .......... 203

2. Consolidated Supervision .......... 204

3. Colleges of Supervisors .......... 206

4. Supranational Competences as an Insufficient Remedy .......... 207

a. Harmonization of Substantive Law .......... 208

b. Current Supranational Competences in Micro-Prudential Supervision .......... 209

c. Banking Union 2012 .......... 210

C. Evaluation.......... 214

1. Political Economics of Public Administration and International Relations .......... 214

2. Supervision of Cross-Border Banking Groups in Particular .......... 216

a. Subsidiaries .......... 216

b. Branches .......... 217

c. Supranational Cure .......... 218

V. SKETCHING AN ALTERNATIVE APPROACH TO TRANSNATIONAL BANKING SUPERVISION .......... 220

I. TRANSNATIONAL CHALLENGES IN BANKING REGULATION AND SUPERVISION

A. The Regulatory Challenges Associated with Integrated Cross-Border Banking Groups

The conventional wisdom in banking theory suggests that allowing financial institutions to provide their services across jurisdictions generates significant benefits for society.1 Efficiency gains accrue with regard to banks' core function as financial intermediaries: economies of scale lower the costs of bringing together capital surpluses with capital needs. The demand-side benefits from improved access to credit where the funds stem from a larger pool of capital under management. The supply-side sees savings allotted to the best investment opportunity picked from those available not only in the domestic market but in many countries. The latter makes banks' portfolios more diverse and hence decreases the dependence of lending on local business cycles. Moreover, local capital markets also receive a boost from the arrival of international actors who bring with them advanced technologies of risk management, payments, and other service offerings as well as methods of information analysis and distribution that local competitors can replicate.2

On the other hand, the trade-off associated with the advantages of cross-border banking is also straightforward: financial systems around the world become more and more interconnected, which in turn expands the potential for negative spillover effects in times of crises. …

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