Agency problems in multinational banks: does parent complexity affect the risk-taking of subsidiaries?

Krzysztof Gajewski and Å ukasz Kurowski

Journal of Credit Risk

Abstract: In recent decades, banks have become increasingly global, which is reflected inter alia in the presence of foreign-owned banks in many countries. A vast amount of literature documents that parent company situations can significantly affect the operations of subsidiaries. Our paper empirically reviews the relationship between the geographical complexity of parent-groups and the risk-taking behavior of subsidiaries using a panel of data for Polish domestically owned and foreign-owned banks covering the years 2008–17. This relationship can be driven by agency problems, as complex banks operating in multiple regions may not be able to efficiently control their subsidiaries. This may create incentives for local managers to take more risks. We find that parent complexity affects risk-taking at the subsidiary level. However, the relationship depends on which proxy measure is used to assess risk-taking. Our results suggest that there is a case for proactive and prudent policies for subsidiaries of complex parent banks.

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