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Determinants of the capital adequacy ratio of foreign banks’ subsidiaries: The role of interbank market and regulation

Mehdi Mili (), Jean-Michel Sahut, Hatem Trimeche and Frédéric Teulon

Research in International Business and Finance, 2017, vol. 42, issue C, 442-453

Abstract: This paper examines the factors influencing the capital adequacy ratio (CAR) of foreign banks. We test whether the CAR of subsidiaries and branches in developed and developing countries depends on the same factors. We use data from 310 subsidiaries and 265 branches to test the impact of the parent banks’ fundamentals on subsidiaries’ and branches’ capital ratios. We also study how the economic condition and regulatory environment in a bank's home country determine foreign banks’ CAR. Our results provide strong evidence that the CAR of subsidiaries and branches operating in developing and developed countries do not depend on the same set of explanatory factors. We also find that the regulatory framework of a parent bank's home country affects the capitalization of its foreign subsidiaries in the host countries. Finally, we show that specific variables of the parent bank have a stronger effect for foreign banks highly related to the interbank market.

Keywords: Capital adequacy ratio; Multinational bank; Interbank market; Regulation; Branch; Subsidiary (search for similar items in EconPapers)
JEL-codes: F15 F34 G21 (search for similar items in EconPapers)
Date: 2017
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