International spillover of bank liquidity shocks: Does organizational form of global banks matter?

Abstract

How does the interconnected nature and organizational form of global banks affects international
spillover of bank liquidity shocks? We show that liquidity shocks to parent global banks
induce a sale of securities held by international branches that rely on parent banks for funding,
but not by international subsidiaries that are independently capitalized and domestically
funded in the host country. The evidence for liquidity shock-induced sales of securities by
global banks branches is stronger during the financial crisis, and for global bank branches that
are financially constrained. Thus, liquidity management within global multinational banks
can contribute to the propagation of liquidity shocks across countries and the transmission of
such shocks depends on the organizational form of global multinational banks. Our results
speak to the current debate on the optimal regulation of global banks (for e.g., the ‘Intermediate
Holding Company’ rule in the U.S. and the ‘Capital Requirements Directive and
Capital Requirements Regulation’ in the E.U) that requires all global banks to organize as
independently capitalized subsidiaries.

Keywords: Global liquidity, Capital flows, Financial crisis, Multinational banks, Multinational enterprises.

JEL Classification: F21, F23, F36, F55, G01, G15