The global development of financial organizations has lead to existence of multinational financial institutions, raising the question about the form of regulation and supervision for them. Such cross-border arrangements of financial activities might have some, although not quite clear, implications on the domestic structure of regulation through several channels. For example, small countries dominated by the foreign banks may relax supervisory activity and thus "import regulation" from stable economies. (Goodhart 2001)
Global financial interconnections certainly involve the need of international cooperation of regulatory activities coping problems like for example provision of financial support to troubled international bank. As Ferguson (2000) argues, longer experience of and closer inter-linkages to international cooperation of central banks make them more suitable for accomplishing supervisory activities as well. However, as Goodhart (2001) suggests, such collaboration is not expected to be damaged by sending two representatives from separated monetary authority and supervisory agency instead of one representative from the united body to international meetings.
The multinationalization of the financial sector might influence the ability of the central bank to conduct monetary policy, which in its turn might affect supervisory arrangement decision. The monetary policy ability largely depends on the exchange rate regime choice. As Goodhart (2001) argues, the floating exchange rate regime still allows the central bank to control short-term interest rate and growth rate of monetary aggregates regardless the global scale of country's financial sector, while under the fixed exchange rate regime the ability of the central bank to influence monetary instruments under the existence of international financial entities becomes fairly weak. He further elaborates that in the case of the irrevocably fixed exchange rate, the central bank completely loses any ability of controlling macroeconomic monetary policy leaving it without function unless supervision. Moreover, the capacity of the central bank to accomplish functions like the LOLR or deposit insurance is limited (partially due to the increase of sizes of banks in the light of the multinationalization of the financial sector, or as a result of, for example, subsidiarity to the ECB) consequently leaving the central bank largely dependent on fiscal authorities, namely the Ministry of Finance (MOF) to make money available for such financial interventions.
Such circumstances make the LOLR function more fiscal rather than monetary matter. Thus, Goodhart (2001) concludes that the role of the central bank to pursuit financial stability depends more on its relationships with the fiscal authorities under the international financial system than otherwise it would be.
Furthermore, under the multinationalization of the financial sector, supervisory authority in one country is concerned with the financial stability in another country which gives rise to concerns about supervisory standards abroad. But since such concerns are bilateral, it has been easily met by agreements on minimal principles or codes in these activities, which as Goodhart (2001) suggests has proliferated at an almost exponential rate during recent years. But codes will have an effect on the behavior of financial institutions only under the existence of credible and fair punishment schemes, for which "naming and shaming" or even exclusion from a financial market could easily serve.
The multinationalization of financial institutions largely strengthened inter-linkage between the health of financial systems of different countries increasing the possibility of contagion effect of financial crisis of one country on the other. This and supervisory concerns abroad, which was mentioned above, have generated the need of international monitoring of supervision and regulation elsewhere. But such need still does not have unambiguous implication for the domestic regulatory organization; there have been proposals of solutions to this problem regardless the domestic structure. Namely, as Goodhart (2001) suggests, international monitoring might be successfully accomplished by international financial agencies like IMF, BIS, IBRD or self-regulation of regulators.
One more important concern is international competition of regulation and supervision created by the ability of multinational financial entities to accordingly change geographical locations. As Greenspan (1994) claims, the single micro-level regulator might have its own separated objective and lose macroeconomic implications of its own actions. (in Goodhart 2001) Such incentive structure would lead them to over-regulation preventing efficiency-generating international competition and innovation. In contrast to this theoretical argument, the empirical study of Di Noia and Di Giorgio (2000) shows that countries with central banks with combined monetary and supervisory functions tend to be associated with more regulated and less developed financial system. They find that for countries where supervision is accomplished solely by the central bank, banks have higher profits at the same time having higher operating costs, which they explain by reduced competition as a result of stricter regulation of "monopolist" supervisor - the central bank. (The list of countries with correspondent regulatory structure is given in the appendix) But they do not test for the possibility that reduced competition and combined regulatory functions might be the result of the same source creating spurious regression, which makes given causality debatable and thus empirical evidence on the complete advantage of any model questionable. Furthermore, as Goodhart (2001) indicates, reduction of international competition of regulatory schemes nonetheless takes place by ongoing harmonization of supervisory and regulatory rules between countries.
International concerns raised by the multinationalization of financial entities can be met with multilateral agreements among countries regardless of the domestic regulatory structure, making this argument for separation of supervisory function from the central bank less important.