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Social Centralization, Bank Integration and the Transmission of Lending Shocks

60 Pages Posted: 3 Aug 2017  

Reint Gropp

Halle Institute for Economic Research

Deyan Radev

Research Center SAFE, Goethe University Frankfurt

Date Written: August 1, 2017

Abstract

We introduce an innovative approach to measure bank integration, based on the corporate culture of multinational banking conglomerates. The new measure, the Power Index, assesses the prevalence of a language of power and authority in the financial reports of global banks. We employ a two-step approach: as a first step, we investigate whether parent-bank or parent-country characteristics are more important for bank integration. In a second step, we analyze whether bank integration affects the transmission of shocks across borders. We find that the level of integration of global banks is determined by parent-bank-specific factors, as well as by the social centralization in the parent’s country: ethnically diverse and linguistically homogenous countries nurture decentralized corporate structures. Political and economic factors, such as corruption, political rights and economic development also affect bank integration. Furthermore, we find that organizational integration affects the transmission of exogenous shocks from parent banks to their subsidiaries: the more centralized a global bank is, the lower the lending of its subsidiaries after a solvency shock. Wholesale shocks do not appear to be transmitted through this channel. Also, past experience with solvency shocks reduces the integration between parents and subsidiaries.

Keywords: Global banks, social centralization, bank integration, shocks, transmission

JEL Classification: G01, G21, G28

Suggested Citation

Gropp, Reint and Radev, Deyan, Social Centralization, Bank Integration and the Transmission of Lending Shocks (August 1, 2017). SAFE Working Paper No. 174. Available at SSRN: https://ssrn.com/abstract=3012003

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Deyan Radev

Research Center SAFE, Goethe University Frankfurt ( email )

House of Finance
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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