Abstract
Regulatory reforms typically follow financial crises. We propose a model of global banking that can be used proactively to study alternative regulatory policies. The model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. The model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or an ad hoc monetary policy intervention would have avoided entirely the negative effects of the sovereign debt crisis on US lending. However, the same measures would have had limited effects in more severe scenarios.
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