Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?

We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark of 202 domestic banks. Contrary to earlier and more contained crises, parent banks were not a significant source of strength to their subsidiaries during 2008–09. When controlling for other bank characteristics, multinational bank subsidiaries had to slow down credit growth almost three times as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale funding.     

Organizational mode choices of multinational banks abroad

We investigate the determinants of organizational modes adopted by multinational banks abroad using a unique database of 98 parent banks and their organizational modes in 169 countries from 2005 to 2015. Our findings reveal that multinational banks operate in various organizational modes abroad, including multiple modes in a single host country; however, subsidiaries are the dominant mode of operation, followed by branches and simultaneously operating branches and subsidiaries in the host country. Furthermore, the characteristics of multinational banks play a significant role in determining their organizational decisions in a host country. Our results indicate that less profitable banks are less likely to open representative offices and are more likely to have branches. In contrast, multinational banks with high asset growth are more likely to operate a representative office abroad and less likely to open a subsidiary. These findings suggest that parent bank profitability and asset growth are important considerations when determining the optimal organizational mode of foreign expansion. Furthermore, country characteristics (particularly openness to economic and capital flows, institutional framework, and geographical and cultural distance) between host and home countries also influence foreign bank operations in a given host country.     

Offshore operations and bank loan contracting: Evidence from firms that set up subsidiaries in offshore financial centers

We examine the effects of a multinational firm's subsidiary operations in offshore financial centers (OFCs) on bank loan contracting terms. Using a propensity score matched cross-country sample of firms with and without OFC subsidiaries, we find that firms with OFC subsidiaries receive less favorable loan terms than firms without OFC subsidiaries. The results from a difference-in-differences analysis and an analysis of a firm's mutation from a non-OFC firm to an OFC firm support the causal effect of offshore operations on the unfavorable loan terms. Furthermore, focusing on firms with OFC subsidiaries, we find that the intensity of offshore operations affects loan terms unfavorably. We also find that the unfavorable effect is more pronounced for more opaque firms and for firms that are headquartered in countries or jurisdictions with weaker legal enforcement. Our findings indicate that banks view offshore operations of borrowers as a credit risk-increasing factor.     

Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries

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 becomes more conspicuous in recent years. 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.     

Foreign Banks in Transition Countries: To Whom Do They Lend and How Are They Financed?

We use focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States to analyze the small‐business lending and internal capital markets of multinational financial institutions. Our approach allows us to complement the standard empirical literature, which has difficulty in analyzing important issues such as lending technologies and capital allocation. We find that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply toward large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets. Second, it is demonstrated that local bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank.     

The multinational bank: A financial MNC?

The theory of non-financial multinational corporations is applied to the multinational commercial bank. The incentives toward multinationality that characterize the expansion of non-financial firms have their counterparts in multinational banks. The theory of the MNC provides a useful basis for the development of a theory of the multinational bank when the subsidiary offices operate in foreign financial markets. When banks' foreign subsidiaries operate in supranational markets (such as the Eurocurrency markets), there is little or no equivalence because the multinational banks compete only among themselves: there is no competition with indigenous firms. The supranational markets give rise to a distinct type of subsidiary. These banking offices and the markets in which they operate serve to integrate national capital and money markets with some possible endangerment to the stability of the international financial system.     

Bank underwriting of debt securities: modern evidence

This article examines debt securities underwritten by Section20 subsidiaries of bank holding companies relative to thoseunderwritten by investment houses. Consistent with a net certificationeffect for banks, bank underwriting of lower credit rated firmsto whom the bank lends results in relatively higher prices (loweryields). We find no evidence of conflicts of interest even whenan issue is used to repay bank debt. Further, banks bring arelatively larger proportion of small issues to the market.Contrary to the contention that universal banking stunts availabilityof finance to small firms, bank underwritings appear to benefitsmall firms.     

Capital Constraints,Asymmetric Information,and Internal Capital Markets in Banking: New Evidence

A growing literature investigates the role of internal capital markets in mitigating financial constraints faced by the subsidiaries of a conglomerate. Most studies have relied on indirect tests based on correlations between the cash flows and the investment of the subsidiaries. In contrast, we avoid the widespread criticisms of such specifications by providing direct tests that focus on the mechanisms through which internal reallocations of funds occur. We find that internal capital markets are used by multibank holding companies to mitigate capital constraints faced by individual bank subsidiaries. In addition, we show that internal capital management within a multibank holding company involves not only the movement of capital to those subsidiaries with a relatively greater need for capital but also the movement of assets (loans) from less well capitalized to better capitalized subsidiaries by means of loan sales and purchases among the subsidiaries. Furthermore, net loan sales are used to allow efficiency‐enhancing specialization among bank subsidiaries, insofar as those subsidiaries with the best loan origination opportunities are able to focus on loan originations even if they do not have sufficient capital to hold the loans. Our evidence is consistent with banks affiliated with holding companies more actively participating in loan sales and purchases because, by using their internal secondary loan market, they are able to avoid the “lemons” problem faced by stand‐alone banks.     

How important are small banks to small business lending?: New evidence from a survey of small firms

Typically, small banks lend a larger proportion of their assets to small businesses than do large banks. The recent wave of bank mergers has thinned the ranks of small banks, raising the concern that small firms may find it difficult to access bank credit. However, bank consolidation will reduce small business credit only if small banks enjoy an advantage in lending to small businesses. We test the existence of a small bank cost advantage in small business lending by conducting the following simple test: If such advantages exist, then we should observe small businesses in areas with few small banks to have less bank credit. Using data on small business borrowers from the 1993 National Survey of Small Business Finance, we find that the probability of a small firm having a line of credit from a bank does not decrease in the long run when there are fewer small banks in the area, although short-run disruptions may occur. Nor do we find that firms in areas with few small banks are any more likely to repay trade credit late, suggesting that such firms are no more credit constrained than firms in areas with many small banks.     

Domestic and multinational determinants of foreign bank profits: The case of Greek banks operating abroad

This paper examines the determinants of profits of Greek banks operating abroad by developing an integrated model that includes a set of determinants informed by the literature on the profitability of both multinational and domestic banks. The basis for our econometric analysis is provided by an unbalanced panel dataset for 19 Greek bank subsidiaries operating in 11 nations, covering the period from 1995 to 2001. The results show that the profitability of the parent bank and the operating experience of its host nation subsidiaries have a robust and positive impact on the profits of Greek banks abroad, whereas subsidiary bank size has a negative effect. Domestic financial factors reflecting stock market developments, bank-specific factors such as liquidity, loan loss provisions or cost efficiency, and market specific factors like concentration or market share in the host nations, are all insignificant in explaining Greek subsidiary banks’ profits.     

Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis

We examine whether foreign and domestic banks in Central and Eastern Europe react differently to business cycles and banking crises. Our panel dataset comprises data of more than 250 banks for the period 1993–2000, with information on bank ownership and mode of entry. During crisis periods domestic banks contracted their credit base, whereas greenfield foreign banks did not. Also, home country conditions matter for foreign bank growth, as there is a significant negative relationship between home country economic growth and host country credit by greenfields. Finally, greenfield foreign banks’ credit growth is influenced by the health of the parent bank.     

SOME EVIDENCE THAT BANKS USE INTERNAL CAPITAL MARKETS TO LOWER CAPITAL COSTS

To the extent raising external capital is especially costly for banks (as the preceding article suggests), bank managers have incentives to manage their internal cash flow in ways that minimize their need to raise external equity. One way to accomplish this is to establish bank holding companies that set up internal capital markets for the purpose of allocating scarce capital across their various subsidiaries. By “internal capital market” the authors mean a capital budgeting process in which all the lending and investment opportunities of the different subsidiaries are ranked according to their risk-adjusted returns; and all internal capital available for investment is then allocated to the highestranked opportunities until either the capital is exhausted or returns fall below the cost of capital, whichever comes first. As evidence of the operation of internal capital markets in bank holding companies, the authors report the following set of findings from their own recent studies:

• ? For large publicly traded bank holding companies, growth rates in lending are closely tied to the banks' internal cash flow and regulatory capital position.
• ? For the subsidiaries of bank holding companies, what matters most is the capital position and earnings of the holding companies and not of the subsidiaries themselves.
• ? The lending activity of banks affiliated with multiple bank holding companies appears to be less dependent on their own earnings and capital than the lending of unaffiliated banks.

The authors also report that, after being acquired, previously unaffiliated banks increase their lending in local markets. This finding suggests that, contrary to the concerns of critics of bank consolidation, geographic consolidation may make banks more responsive to local lending opportunities.     

Trends in Organizational Form and their Relationship to Performance: The Case of Foreign Securities Subsidiaries of U.S. Banking Organizations

Debate about the effects of permitting U.S. commercial banks to expand their range of activities has intensified in recent years. Some observers worry that banks with access to a federal safety net have strong incentives to use new opportunities to take greater risks and increase their likelihood of failure at possible cost to the FDIC and taxpayers. Others fear that the safety net might give banks a competitive advantage relative to nonbank rivals. A key element of this debate is whether a holding company structure does a significantly better job of mitigating against these potential problems than a bank subsidiary alternative and should be made mandatory for banking organizations that want to engage in nontraditional activities. Unfortunately, hard, current empirical evidence on the benefits and costs of alternative structures generally is lacking. The purpose of this paper is to provide this sort of evidence. In the study, annual financial data for the 1987–1997 period for an unbalanced panel of foreign securities subsidiaries of U.S. banking organizations are used to investigate two questions: What factors influence how bank holding companies organize securities activities when they have a choice? And are the observed differences in organizational form related to significant differences in key measures of subsidiary performance? This sort of study is possible because U.S. banking organizations can and do engage in securities activities through subsidiaries of the bank as well as holding company affiliates. These subsidiaries also file financial reports with bank regulators. A probit model is used to empirically identify important factors influencing structural choice. Univariate and multivariate statistical techniques are used to determine whether or not differences in subsidiary structure are related to differences in subsidiary risk, funding costs, and efficiency. Simultaneity is investigated to a limited extent. In brief, the empirical results do not support the position of the holding company proponents. Safety net subsidy incentives don’t appear to be a primary determinant of structural choice. The evidence does not indicate that bank-owned securities subsidiaries tend to be more risky than holding company securities subsidiaries. Bank securities subsidiaries also do not appear to enjoy any funding advantage relative to holding company subsidiaries. These two results are particularly noteworthy because section 23A and 23B restrictions on intracompany funding currently do not apply to transactions between banks and their direct and indirect bank subsidiaries. Finally, some evidence indicates that bank subsidiaries tend to be more efficient.     

Credit growth in Central,Eastern, and South-Eastern Europe: The case of foreign bank subsidiaries

In this paper, we investigate the credit growth of foreign-owned banks in Central, Eastern, and South-Eastern Europe from 2000 to 2014. We intend to show whether foreign capital in the banking sector should be treated as a monolith, as it currently is in the literature. To this end, we analyse credit growth based on the status of the parent company (global systemically important banks, or G-SIBs, vs. non-GSIBs) and European Union membership of the countries of the subsidiaries. The analyses are carried out on a panel of banks with the use of the panel corrected standard error methodology. Additionally, we differentiate between the pre-crisis and crisis/post-crisis periods to identify whether the policy of parents changed after the outbreak of the crisis. We find important differences in the determinants of the credit growth of subsidiaries, indicating that foreign capital in the banking sector should not be treated as a monolith.     

Determinants of the capital adequacy ratio of foreign banks’ subsidiaries: The role of interbank market and regulation

This paper examines the factors influencing the capital adequacy ratio (CAR) of foreign banks. We test whether the CAR of subsidiaries and branches in developed and developing countries depends on the same factors. We use data from 310 subsidiaries and 265 branches to test the impact of the parent banks’ fundamentals on subsidiaries’ and branches’ capital ratios. We also study how the economic condition and regulatory environment in a bank's home country determine foreign banks’ CAR. Our results provide strong evidence that the CAR of subsidiaries and branches operating in developing and developed countries do not depend on the same set of explanatory factors. We also find that the regulatory framework of a parent bank's home country affects the capitalization of its foreign subsidiaries in the host countries. Finally, we show that specific variables of the parent bank have a stronger effect for foreign banks highly related to the interbank market.     

FINANCIAL TRANSACTIONS WITHIN BANK HOLDING COMPANIES

This study explores financial transactions within bank holding companies in both a theoretical and an empirical context. Empirical analysis focuses on two major types of interaffiliate financial transactions—extensions of credit and transfers of assets—between holding company banks and their nonbank affiliates (defined to include the parent company and nonbank subsidiaries of the parent) over the period 1976–1980. The data generally point to a net downstream flow of funds from the nonbank sector to the bank sector of a holding company, with the downstream fund flows particularly strong in the case of extensions of credit. In part, this result may reflect the statutory restrictions on bank lending to affiliates, particularly the collateral requirements.     

Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment

The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro‐prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time‐varying, bank‐specific minimum capital requirements since Basel I. It is found that regulated banks (UK‐owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one‐third of the initial impulse from the regulatory change.     

Foreign Banks: Trends and Impact

Over the past two decades, foreign banks have become much more important in domestic financial intermediation, heightening the need to understand their behavior. We introduce a new, comprehensive database, made publicly available, on bank ownership (including the home country of foreign banks) for 5,324 banks in 137 countries over the period 1995–2009. We document large increases in foreign bank presence in many countries, but with substantial heterogeneity in terms of host and banks’ home countries, bilateral investment patterns, and bank characteristics. In terms of impact, we document that the relation between private credit and foreign bank presence importantly depends on host country and banks’ characteristics. Specifically, foreign banks only seem to have a negative impact on credit in low‐income countries, in countries where they have a limited market share, where enforcing contracts is costly and where credit information is limited available, and when they come from distant home countries. This shows that accounting for heterogeneity, including bilateral ownership, is crucial to better understand the implications of foreign bank ownership.     

The relationship between liquidity risk and credit risk in banks

This paper investigates the relationship between the two major sources of bank default risk: liquidity risk and credit risk. We use a sample of virtually all US commercial banks during the period 1998–2010 to analyze the relationship between these two risk sources on the bank institutional-level and how this relationship influences banks’ probabilities of default (PD). Our results show that both risk categories do not have an economically meaningful reciprocal contemporaneous or time-lagged relationship. However, they do influence banks’ probability of default. This effect is twofold: whereas both risks separately increase the PD, the influence of their interaction depends on the overall level of bank risk and can either aggravate or mitigate default risk. These results provide new insights into the understanding of bank risk and serve as an underpinning for recent regulatory efforts aimed at strengthening banks (joint) risk management of liquidity and credit risks.     

Bank risk and monetary policy

We find evidence of a bank lending channel operating in the euro area via bank risk. Financial innovation and the wider use of new ways of transferring credit risk have tended to diminish the informational content of standard bank balance sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e., size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess banks’ ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes.