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

2010; International Monetary Fund; Volume: 10; Issue: 247 Linguagem: Inglês

10.5089/9781455209477.001

2227-8885

Yulia Makarova, Anna Ilyina, Christian Schmieder, Eugenio Cerutti,

Credit Risk and Financial Regulations

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.