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International banking conglomerates and the transmission of lending shocks across borders

Reint Gropp and Deyan Radev

No 175, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: We investigate how solvency and wholesale funding shocks to 84 OECD parent banks affect the lending of 375 foreign subsidiaries. We find that parent solvency shocks are more important than wholesale funding shocks for subsidiary lending. Furthermore, we find that parent undercapitalization does not affect the transmission of shocks, while wholesale shocks transmit to foreign subsidiaries of parents that rely primarily on wholesale funding. We also find that transmission is affected by the strategic role of the subsidiary for the parent and follows a locational, rather than an organizational pecking order. Surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. We further document that parent banks tend to use their own capital and liquidity buffers first, before transmitting. Finally, we show that solvency shocks have higher impact on large subsidiary banks with low growth opportunities in mature markets.

Keywords: commercial banks; global banks; wholesale shocks; solvency shocks; transmission; internal capital markets (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-ifn
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:175

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