German Banks in Financial Centers: How Risky is Their Business?
17 Pages Posted: 3 Apr 2018
Date Written: February 7, 2018
Before as well as after the financial crisis of 2008, German banks’ financial center affiliates have been on aggregate four times as large as the affiliates located elsewhere, and their balance sheet total has been half the size of the German parent banks’ aggregate total assets. In addition, they are strongly connected with financial players in other financial centers, making them susceptible to distress in financial markets. German banks’ affiliates in financial centers operate predominately as branches, as opposed to subsidiaries. This promotes the transmission of shocks to the parent bank due to the balance sheet consolidation. Financial center affiliates constantly have to roll over large amounts of short-term debt. As a consequence, they required larger injections of liquidity from their parent banks during the recent financial crisis. Balance sheet risk for parent banks is most likely to arise from financial center branches, as they are, in general, weakly capitalized. A change in accounting rules in December 2010 revealed their strong, formerly off-balance sheet involvement in derivatives trading.
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