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Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries

Bang Jeon (), Maria Olivero () and Ji Wu

No 52013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994-2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries¡¦ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and became more conspicuous in recent years than before. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries' reliance on funds from their parent bank, the subsidiaries' entry mode, and the capital account openness and banking market structure in host countries.

Keywords: Internal Capital Markets; Multinational Banking; Transmission of Financial Shocks (search for similar items in EconPapers)
JEL-codes: E44 F43 G21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2013-05
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-mac
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