Finance: Research, Policy and Anecdotes

Is cross-border supervisory cooperation effective?

As part of a revision of my recent paper with Consuelo Silva-Buston and Wolf Wagner, we have explored whether stronger cooperation between supervisors is associated with higher stability.  This is summarized in this Vox column.  Herewith the one-paragraph version: Banks where the parent supervisor has cooperation agreements with a larger number of host supervisors (weighted by share of each subsidiary’s assets in total foreign assets of the parent bank), have higher z-scores and a lower marginal expected shortfall (so both a book and a market-based stability measure).  However, these findings are driven by the “smaller” cross-border banks – the larger one might be simply too big or too complex. This relationship is as strong during normal and during crisis times. Obviously, this relationship could be a spurious one – confirming our results with political affinity between countries as instrument for cooperation and the fact that we exploit within-bank variation rather than cross-bank or cross-country variation makes this less likely, however.