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Credit risk of foreign bank branches and subsidiaries in Argentina and Uruguay

Michael Brei and Carlos Winograd

No 2018-12, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The paper presents both theoretical and empirical analysis to explain the differences in credit risks between branches and subsidiaries of foreign banks. Using a model with costly monitoring and asymmetric information (from the perspective of host country regulators and parent banks), we show theoretical evidence that the optimal amount of monitoring increases with the size of foreign affiliates (relative to their parent banks), regardless of whether their legal form is of a branch or subsidiary. In the case of small affiliates, we argue that there is a conflict of interest between parent banks and regulators, the former of which prefer to operate with riskier and ring-fenced subsidiaries, and the latter of which prefer better-monitored and co-insured branches. Using bank-level data on Argentina and Uruguay prior to their financial crises of 2001-02, we find that (i) larger foreign branches have lower ratios of non-performing loans than foreign subsidiaries and smaller branches and (ii) branches headquartered in more developed economies had fewer non-performing loans.

Keywords: Bank risks; branches; subsidiaries (search for similar items in EconPapers)
JEL-codes: G21 G15 F36 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2018-12

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