Jay Surti

Subsidiaries or Branches; Does One Size Fit All?

The paper examines the relative advantages of different organizational structures for cross-border banking groups and their home and host countries, and discusses the factors influencing a banking group’s choice of branch versus subsidiaries, as well as the financial stability implications for home and host countries. It concludes that, given the diversity of business lines and the varying stages of financial development of different countries, there is no one optimal structure for cross-border expansion. It also notes that, in the absence of an effective cross-border resolution framework, resolving cross-border banking groups organized as subsidiaries may be less costly or destabilizing than resolving groups organized as branches. The ultimate key to financial stability, however, lies in the design of mechanisms that ensure effective oversight and orderly resolution of banks, both at a national and global level. Achieving this objective would reduce financial stability risks of home and host countries and allow banks to organize themselves in a way that best fits their business models.

The Too-Important-To-Fail Conundrum: Impossible to Ignore and Difficult to Resolve

DISCLAIMER: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Making Banks Safer: Can Volcker and Vickers Do it?

This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures - the Volcker Rule in the United States and retail ring-fencing in the United Kingdom - are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks.

Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help?

The U.S., the U.K., and more recently, the E.U., have proposed policy measures directly targeting complexity and business structures of banks. Unlike other, price-based reforms (e.g., Basel 3 and G-SIFI surcharges), these proposals have been developed unilaterally with material differences in scope, design and implementation schedules. This may exacerbate cross-border regulatory arbitrage and put a further burden on consolidated supervision and cross-border resolution. This paper provides an analysis of the potential implications of implementing different structural policy measures. It proposes a pragmatic and coordinated approach to development of these policies to reduce risk of regulatory arbitrage and minimize unintended consequences. In doing so, it also aims to identify a set of common policy measures that countries could adopt to re-scope bank business models and corporate structures.

Can Covered Bonds Resuscitate Residential Mortgage Finance in the United States

This paper considers the case for mortgage covered bonds as an alternative to the originate-to-distribute mortgage funding model. It argues that the economic incentives provided to market participants under the covered bonds model are less susceptible to moral hazard even while retaining the key benefits of securitization such as capital market funding and flexibility in risk allocation. Notwithstanding these advantages, however, limited market size and the greater pro-cyclicality of mortgage loan quality in the United States - potentially reflecting borrower incentives under the personal bankruptcy framework - impose limits on the benefits ensuing from this model. The analysis underscores the need for a comprehensive legal-regulatory framework to underpin market development and discusses a number of ways in which the current draft legislation may be further strengthened. A potential strategy to hasten market development within the current institutional framework is identified.