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International Banking Conglomerates and the Transmission of Lending Shocks Across Borders

64 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 investigate how solvency and wholesale funding shocks to 84 OECD parent banks affect the lending of 375 foreign subsidiaries. We find that parent solvency shocks are more important than wholesale funding shocks for subsidiary lending. Furthermore, we find that parent undercapitalization does not affect the transmission of shocks, while wholesale shocks transmit to foreign subsidiaries of parents that rely primarily on wholesale funding. We also find that transmission is affected by the strategic role of the subsidiary for the parent and follows a locational, rather than an organizational pecking order. Surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. We further document that parent banks tend to use their own capital and liquidity buffers first, before transmitting. Finally, we show that solvency shocks have higher impact on large subsidiary banks with low growth opportunities in mature markets.

Keywords: Commercial banks, global banks, wholesale shocks, solvency shocks, transmission, internal capital markets

JEL Classification: G01, G21, G28

Suggested Citation

Gropp, Reint and Radev, Deyan, International Banking Conglomerates and the Transmission of Lending Shocks Across Borders (August 1, 2017). SAFE Working Paper No. 175. Available at SSRN: https://ssrn.com/abstract=3012016

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
Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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