The paper analyses the possible introduction by national supervisory authorities of limits to capital mobility between subsidiaries of cross-border banking groups following the realization of losses in one subsidiary. The work also analyses the effects of the establishment of a supranational supervisory authority on capital mobility within cross-border banking groups and on risk-taking in loan issuance.
When the correlation between the returns on loans issued by subsidiaries of a cross-border banking group is positive, it is optimal for national supervisory authorities to impose limits on capital mobility towards impaired subsidiaries. In such a case, the establishment of a supranational authority instead of national authorities would facilitate mutual support across subsidiaries of a banking group and lead to a reduction in the dispersion of loan risks across banking groups.
