International Banking Conglomerates and the Transmission of Lending Shocks Across Borders

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.JEL classification: G01, G21, G28

Social Centralization, Bank Integration and the Transmission of Lending Shocks

“…Contrary to the findings of Cetorelli and Goldberg (2012b) for the U.S., on a global level Gropp and Radev (2017) observe locational pecking order in the transmission of solvency, rather than of wholesale shocks, which highlights the need for a more specific definition of the source of liquidity needs of a global bank.…”

“…Overall, we confirm the results of Gropp and Radev (2017), who find that mainly solvency shocks transmit to foreign subsidiaries. However, our study reveals that authoritative 4 corporate culture, determined by the cultural characteristics of the parent country, is the main driver of this transmission.…”

“…We measure the size of the bank as the logarithm of the average total assets in the sample period. It is a standard measure for the maturity of a bank and, as argued by Gropp and Radev (2017), it may also reflect the bank's growth potential.…”

“…To investigate the effect of corporate culture on the transmission of shocks from the parent bank to its foreign subsidiaries, we follow Gropp and Radev (2017) and estimate the following model:…”

“…Cetorelli and Goldberg (2012b) find that in managing liquidity, U.S. parents that are hit by a liquidity shock rely on a locational pecking order, which protects subsidiaries in markets that are strategically important to the multinational bank. Gropp and Radev (2017) investigate the transmission of both solvency and liquidity shocks from parents to foreign subsidiaries and find evidence for a stronger transmission of solvency shocks, while the liquidity shocks are transmitted only in the cases where the parent relies heavily on wholesale funding.…”