Internal Capital Markets and Corporate Politics in a Banking Group

Abstract

We analyze proprietary internal capital allocation data from a large retail-banking group consisting of member banks and a headquarters organization. Capital allocations from headquarters compensate for deposit shortfalls at the bank level, suggesting that headquarters offers deposit smoothing to its member banks. We then analyze how the distribution of influence within the group relates to capital allocations and lending behavior. More influential banks are allocated more funds from headquarters and their loan growth is less sensitive to their deposit base. The effects of influence are stronger if banks have greater demand for deposit smoothing.

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

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