Foreign Bank Subsidiaries'Default Risk During the Global Crisis: What Factors Help Insulate Affiliates from Their Parents?

45 Pages Posted: 20 Apr 2016

See all articles by Deniz Anginer

Deniz Anginer

World Bank Research

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Maria Soledad Martinez Peria

International Monetary Fund (IMF)

Date Written: October 1, 2014

Abstract

This paper examines the association between the default risk of foreign bank subsidiaries and their parents during the global financial crisis, with the purpose of understanding what factors can help insulate affiliates from their parents. The paper finds evidence of a significant positive correlation between parent banks' and foreign subsidiaries' default risk. This correlation is lower for subsidiaries that have higher capital, retail deposit funding, and profitability ratios and that are more independently managed from their parents. Host country regulations also influence the extent to which shocks to the parents affect the subsidiaries' default risk. In particular, the correlation between the default risk of the subsidiary and the parent is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements and tougher restrictions on bank activities.

Keywords: Economic Insecurity

Suggested Citation

Anginer, Deniz and Cerutti, Eugenio and Martinez Peria, Maria Soledad, Foreign Bank Subsidiaries'Default Risk During the Global Crisis: What Factors Help Insulate Affiliates from Their Parents? (October 1, 2014). World Bank Policy Research Working Paper No. 7053. Available at SSRN: https://ssrn.com/abstract=2504807

Deniz Anginer (Contact Author)

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

Eugenio Cerutti

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Maria Soledad Martinez Peria

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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