- Regulation of banks — Credit risk — Capital markets — Supervision
This chapter discusses banking group supervision. At first glance the necessity for the supervision of banking groups is not obvious. However, banks are now known to be subject to contagion risk. In theory the failure of a company which is a member of a bank group has no effect on the regulated bank. In practice, the failure of a company in a bank group will send a strong signal to the outside world that the group is in difficulty. It would in theory be possible to operate a group bank with such a degree of separation that the market as a whole believed that the bank would genuinely be unaffected by the failure of one of its subsidiaries. However, in practice the market believes that banks are closely connected with the groups of which they are members, and that failures elsewhere in a group will have important knock-on consequences for a group bank.
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