DP4990 | Cooperation in International Banking Supervision

Publication Date

23/04/2005

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Abstract

This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ?cheap talk?. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ?type I? and ?type II? in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned.