José L. Fillat, Stefania Garetto and Arthur V. Smith
The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected
large banks, especially those with a global presence. These reforms were reactive to the crisis.
In this paper we propose a structural model of global banking that can be used proactively to
perform counterfactual analysis on the effects of alternative regulatory policies. The structure
of the model mimics the US regulatory framework and highlights the organizational choices that
banks face when entering a foreign market: branching versus subsidiarization. When calibrated
to match moments from a sample of European banks, the model is able to replicate the response
of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis
suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy
interventions would have mitigated the effects of the crisis on US lending.
Keywords: global banks, banking regulation, shock transmission.