The Funding of Subsidiaries Equity, Double Leverage, and the Risk of Bank Holding Companies

Journal of Business Finance and Accounting, issue 45 1-2, Forthcoming, DOI: 10.1111/jbfa.12288

Posted: 30 Oct 2014 Last revised: 30 Oct 2017

See all articles by Silvia Bressan

Silvia Bressan

Free University of Bozen-Bolzano - Faculty of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2017

Abstract

Banking groups exploit double leverage when “debt is issued by the parent company and the proceeds are invested in subsidiaries as equity” (Board of Governors of the Federal Reserve Sys-tem (2016)). Financial authorities have frequently raised concerns about the issue of double lev-erage because this type of intra-firm financing appears to allow for both the arbitrage of capital and the assumption of risk. This article focuses on the relationship between double leverage and risk-taking within banking groups. First, we discuss this relationship based on an examination of balance sheet figures. Second, we analyse a large sample of United States Bank Holding Com-panies (BHCs) from 1990-2014. The results show that BHCs are more prone to risk when they increase their double leverage, namely, when the stake of the parent within subsidiaries is larger than the stand-alone capital of the parent. This paper’s primary implication for policymakers is that the regulators of complex financial entities should more efficiently address the issue of double leverage, thereby limiting the potential negative consequences that arise from corporate instability.

Keywords: Bank Holding Companies, Equity Financing, Double Leverage, Risk

JEL Classification: G21, G32

Suggested Citation

Bressan, Silvia, The Funding of Subsidiaries Equity, Double Leverage, and the Risk of Bank Holding Companies (July 2, 2017). Journal of Business Finance and Accounting, issue 45 1-2, Forthcoming, DOI: 10.1111/jbfa.12288, Available at SSRN: https://ssrn.com/abstract=2516208 or http://dx.doi.org/10.2139/ssrn.2516208

Silvia Bressan (Contact Author)

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

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