Internal Capital Markets and Corporate Politics in a Banking Group

Abstract:     
This study looks inside a large retail-banking group to understand how influence within the group affects internal capital allocations and lending behavior at the member bank level. The group consists of 181 member banks that jointly own a headquarters. Influence is measured by the divergence from one-share-one-vote. We find that more influential member banks are allocated more capital from headquarters. They are less likely to decrease lending after negative deposit growth or to increase lending following positive deposit growth. These effects are stronger in situations in which information asymmetry between banks and the headquarters seems greater. The evidence suggests that influence can be useful in overcoming information asymmetry.

Keywords: internal capital markets, capital markets, retail banking, corporate politics

JEL Classifications: G21, G31, G32, G34, M40, M46

Working Paper Series