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Financial synergies and systemic risk in the organization of bank affiliates

Elisa Luciano () and Clas Wihlborg

Journal of Banking & Finance, 2018, vol. 88, issue C, 208-224

Abstract: We analyze theoretically banks’ choice of organizational structures in branches, subsidiaries or stand-alone banks, in the presence of public bailouts and default costs. These structures are characterized by different arrangements for internal rescue of affiliates against default. The cost of debt and leverage are endogenous. For moderate bailout probabilities, subsidiary structures, wherein the two entities provide mutual internal rescue under limited liability, have the highest group value, but also the highest risk taking as measured by leverage and expected loss. We explore the effect of constraints on leverage and policy implications. The conflict of interests between regulators, who minimize systemic risk, and banks, who maximize their own value, is mitigated when capital requirements are effective.

Keywords: Bank organization; Bank risk; Financial synergies; Endogenous leverage in banking; Default costs; Bailouts (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jbfina:v:88:y:2018:i:c:p:208-224