How important is territorial bias in prudential supervision and regulation?

Abstract

Purpose – The purpose of this paper is to measure and rank territorial bias in prudential supervision and regulation in 22 EU and non-EU countries with financial systems predominantly owned by foreign banks. Design/methodology/approach – Twenty-two host countries are surveyed along six dimensions. First a scoring system is developed to measure territorial bias on an individual country basis (vertical analysis). Second the results are compared across two peer groups EU and non-EU (horizontal analysis). Findings – Territorial bias is present to a varying degree in the prudential supervision and the regulations of the countries surveyed. On average higher territorial bias is observed in the non-EU group. Generally there is also less dispersion in the EU which can be explained by a common regulatory framework and the efforts to achieve supervisory convergence. Non-EU countries use a wider array of instruments typically higher capital ratios stricter local governance requirements and liquidity restrictions. Originality/value – This is the first quantitative measure and analysis of territorial bias in prudential supervision and regulation that has been established. It includes confidential supervisory measures and measures imposed by moral suasion.