Implicit guarantees and bank stability: Evidence from a quasi-natural experiment

Anna L. Sobiech, Lechedzani Kgari, Linh Nguyen and John O.S. Wilson

Journal of International Economics, 2025, vol. 155, issue C

Abstract: Do parent bank implicit guarantees enhance or diminish the stability of foreign subsidiaries? Using a quasi-natural experiment in the form of a regulatory intervention which removed parent banks' option to provide financial support to affiliated foreign subsidiaries, we find a substantial increase in the overall default risk of foreign subsidiaries. Less stringent private and supervisory oversight in host countries exacerbates the adverse impacts on risk. Overall, the results align with the notion that a loss in implicit guarantees implies a decline in reputational capital and franchise value. Beyond financial stability, the intervention likely has economic implications. Foreign subsidiaries increase lending and deposit funding, particularly those with stronger initial capitalization. These patterns are consistent with risk-compensating behavior where subsidiaries, following the loss of parental guarantees, expand balance sheets to sustain funding and market presence. Our findings inform ongoing policy debates regarding the merits of implicit guarantees for bank stability.

Keywords: Implicit guarantees; Bank stability; Ringfencing; Cross-border banking; Africa (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:155:y:2025:i:c:s0022199625000509

DOI: 10.1016/j.jinteco.2025.104094

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