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

Abstract

This paper presents a stylized analysis of the effects of ring-fencing (i.e., different restrictions oncross-border transfers of excess profits and/or capital between a parent bank and its subsidiarieslocated in different jurisdictions) on cross-border banks. Using a sample of 25 large Europeanbanking groups with subsidiaries in Central, Eastern and Southern Europe (CESE), we analyzethe impact of a CESE credit shock on the capital buffers needed by the sample banking groupsunder different forms of ring-fencing. Our simulations show that under stricter forms of ringfencing,sample banking groups have substantially larger needs for capital buffers at the parentand/or subsidiary level than under less strict (or in the absence of any) ring-fencing.