On 28 July 2022, the European Central Bank (ECB) published a Working Paper on voluntary support and ring-fencing in cross-border banks.
The paper provides a theoretical contribution to the ring-fencing debate in the context of supervisory intervention in an impaired subsidiary of a cross-border bank (CBB).
Amongst other things, the paper addresses the following questions:
- When does ring fencing limit cross-unit voluntary support and how does this affect the efficiency of the intervention outcome?
- How does the anticipation of ring-fencing impact on the cross-border bank’s risk taking incentives?
- Under what condition would the establishment of a supranational authority be welfare improving, and is it compatible with the interests of national authorities to protect national deposit insurance funds?
To answer these questions, the ECB develops a framework in which a CBB may wish to provide voluntary support to an impaired subsidiary using resources from a healthy subsidiary.