Integrated cross-border banking groups may provide important efficiency gains arising from the scale and diversification of their operations, but their failure can also generate spillovers that threaten financial stability in countries in which they operate. Cross-border expansion by banking groups through integrated branch networks appears to be less costly and, in some cases, more efficient than establishing a series of legally independent subsidiaries. In the event of failure of a banking group however, it appears that a subsidiary structure would generally be less costly to resolve.

A key consideration for policymakers then, is whether the trade-off between efficiency and financial stability argues for policies that reflect a preference for certain cross-border banking structures. This paper examines the relative advantages and disadvantages of different organisational structures for cross-border banking groups, both from the point of view of the financial groups and of the home/host authorities. It concludes that given the diversity of business lines and the varying objectives and stages of financial development of different countries, there is no one obvious structure that is best suited in all cases for crossborder expansion—one size does not fit all when it comes to the choice of organisational structure.

From a banking group’s perspective, a range of factors play a role in the choice of branching versus subsidiarisation, including banks’ business focus and differences in regulatory and tax regimes across jurisdictions. Banks with significant wholesale operations tend to prefer a more centralised branch model that provides the flexibility to manage liquidity and credit risks globally, and serve the needs of large clients. The funding costs for the wholesale group are likely to be lower under the branch structure, given the flexibility to move funds to where they are most needed. A subsidiary structure, in contrast, puts constraints on the banking group’s ability to transfer funds across borders and hence may be less suitable for wholesale activities. For a global retail bank however, a more decentralised subsidiary model may work better because of its focus on serving local retail clients and its reliance on local deposits and local deposit guarantees.

From the authorities’ perspective, the trade-off between financial stability and efficiency will vary depending on a country’s status as home or host to cross-border banking groups. Home authorities might prefer a cross-border bank structure with stricter firewalls across parts of the group (the subsidiary model) when their banks expand into countries with weak economies and a risky business environment. Host authorities might also prefer the subsidiary model, if conditions in their country are conducive to a healthy banking sector, because it allows them to shield the affiliate from the problems of its parent. By contrast, countries with underdeveloped financial systems and weak economies may prefer global banks to enter via full service branches that can provide credit services based on the strength of the parent. The quality of a country’s supervision, the adequacy of its information-sharing and supervisory coordination, and the systemic importance of the affiliate for home and host financial systems also play a role in home/host preferences for branch versus subsidiary structures.

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