Extensive foreign control of bank assets in nearly all the new member states highlights the importance of information sharing.
The entry to the EU of 10 new members, eight of which are central or eastern European (CEE) countries, brings many advantages but for the banking sectors in these CEE states there are also some concerns.
The issue concerns the share of total bank assets held by foreign-controlled banks which exceeds 70% in most of these new member states, with the exception of Slovenia.
According to the European Shadow Financial Regulatory Committee (ESFRC), the high concentration of foreign ownership “creates challenges for regulators with respect to the supervision of the foreign-owned banks, and the development of securities markets”.
In short, the potential for deficiencies in the sharing of information (between home and host supervisor) creates scope and incentives for increasing the risk of host country subsidiaries.
Specifically, if a multinational bank as a whole is in difficulties, it might shift risk to the subsidiary where it expects the greatest government support. If the subsidiary goes bankrupt, it is the deposit insurance system in the host country that is responsible for providing support.
This implies losses, which are borne by local taxpayers. High banking concentration in a host country adds to the likelihood of a bail-out, because the government may be unwilling to accept the failure of a subsidiary which constitutes a substantial part of the country’s financial system.
While multinational bank owners are unlikely to get into difficulties, it is possible, and this risk can lead to increased provisioning and extra cost. As a solution, the ESFRC recommends a substantial increase in the flow of information from home country supervisor to host country supervisor. As in most financial matters the flow of information should be a two-way street.
