Multinational Banks and Supranational Supervision

Supervision of multinational banks (MNBs) by national supervisors suffers from coordination failures. We show that supranational supervision solves this problem, and decreases the expected costs of a MNB's default, taking its organizational structure as given. However, the MNB strategically adjusts its structure to the new supervisory framework. It converts its subsidiary into a branch, or conversely, with a view to reducing supervisory monitoring. We identify the cases in which this endogenous reaction leads to unintended consequences, such as higher costs to the deposit insurance fund, lower welfare, or closure of the MNB's foreign unit. Current reforms of MNB supervision should thus take into account that MNBs adapt their organizational structures to changes in supervision