Internal capital markets and crisis transmission: evidence from foreign bank subsidiaries in CESEE

Vukan Vujic ()
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Vukan Vujic: Central European University

Focus on European Economic Integration, 2015, issue 3, 39-56

Abstract: The aim of this paper is to analyze the impact of European bank deleveraging on the asset growth of European banks’ CESEE subsidiaries. Our estimation of the effects of parent bank funding on subsidiaries’ asset growth relies on the instrumental variables strategy, instrumenting for intragroup flows with exposure to the sovereign debt of Ireland, Greece, Spain and Portugal. The novelty of this analysis is the differentiation between equity and nonequity intragroup flows and the inclusion of a significant number of countries in the sample. Previous studies in this area either did not analyze the role of equity flows or focused on one country only. The present study finds that intragroup flows have a significant effect on subsidiaries’ asset growth. A 1 percentage point increase in equity flows leads to a 6.1 percentage point increase in assets; the same increase in nonequity flows leads to a 1.7 percentage point increase in assets. This finding has significant policy implications for the regulation of domestic banks and cross-border regulatory cooperation.

Keywords: deleveraging; multinational banks; related party transactions (search for similar items in EconPapers)
JEL-codes: F23 F36 G21 (search for similar items in EconPapers)
Date: 2015
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