A Model of Takeovers of Foreign Banks

Abstract

This paper investigates the determinants of the takeover of a foreign bank by a domestic bank whereby the former becomes a branch of the latter. Each bank is initially supervised by a national agency that cares about closure costs and deposit insurance payouts, and may decide the early closure of the bank on the basis of supervisory information. Under the principle of home country control, the takeover moves responsibility for both the supervision of the foreign bank and the insurance of the foreign deposits to the domestic agency. It is shown that the takeover is more likely to happen if the foreign bank is small (relative to the foreign banking market) and its' investments are risky (relative to those of the domestic bank). Moreover, the takeover is in general welfare improving for both countries.

Keywords: International banks, takeovers in banking, cross-border bank mergers, bank supervision, bank closure, deposit insurance, home country control

JEL Classification: G21, G28, G34