Chapter 11. Bankers without Borders? Implications of Ring-Fencing for European Cross-Border Banks

Abstract

This chapter 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.

Contributor Notes

This chapter was previously published as IMF Working Paper 10/247 (Cerutti and others, 2010). It has benefited from comments by Bas Bakker, Jan Brock-meijer, Miroslav Kollar, Inci Otker-Robe, Daniel Hardy, Jérôme Vandenbussche, and Rachel van Elkan, as well as by the participants of a Monetary and Capital Markets Department and European Department seminar.
Author: Ms. Li L Ong