بانکداری چند ملیتی و انتقال بین المللی شوک های مالی: شواهدی از شعبه های بانک خارجی

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.

The impact of foreign banks on host economies has been widely debated as the presence of foreign banks has increased rapidly in developing and emerging economies in recent years. On the one hand, foreign banks that operate in host economies under global networks of multinational banking (subsidiaries or branches) have contributed to enhancing the efficiency, competitiveness, and stability of the banking systems in host economies (McCauley et al., 2010 and Jeon et al., 2011). On the other hand, foreign banks have also been observed to act as a destabilizing force, as short-term profit seeking speculators, as home-biased international lenders, or as a source of contagion by transmitting adverse shocks from the home country to various host countries, especially when the banks’ home countries experience a banking crisis (Roubini and Mihm, 2010, Popov and Udell, 2012, De Haas and Van Horen, 2012, Giannetti and Laeven, 2012a and Giannetti and Laeven, 2012b). The recent global financial crisis provides a convincing example that foreign banks are potential vehicles for spreading financial shocks from the home countries in the US and Western Europe to emerging and developing economies. However, the speed and strength of this international transmission of financial shocks through the network of foreign banks have varied from continent to continent, and have also been affected by various banking market conditions and the business strategies adopted by these foreign banks. Conglomerate banks or multibank holding companies have established and utilized internal capital markets for both shifting risk between the headquarters and its subsidiaries, and reallocating revenues across the latter.1 Internal capital markets have also provided unique opportunities for multinational banks to use limited resources efficiently by optimally allocating them across the network of global subsidiaries, to thereby overcome financial market frictions and save on the costs of external finance. When multinational banks rely more heavily on internal capital markets, we expect lending decisions by subsidiaries in host countries to be significantly affected by the financial strength of parent banks in home countries.2 In this paper, we study the role that internal capital markets in multinational banking play as a channel of transmission of financial shocks across countries. Using bank-level data for the major multinational parent banks from industrial countries and their foreign subsidiaries operating in emerging and developing countries during the period 1994–2008, we explore the empirical evidence on whether intra-bank internal capital markets contribute, through the supply of loans, to the transmission of financial shocks from parent banks in the home country to their foreign subsidiaries in the host countries. We also investigate various aspects of internal capital markets as a channel of transmission of financial shocks, including: first, whether the role of intra-bank internal capital markets varies in transmitting favorable versus adverse shocks; second, if there are any differences in this transmission channel across regions, namely, Central and Eastern Europe, Asia and Latin America; third, whether this process is global or only regional; and last, whether the strength of transmission has changed over time. We also explore various conditions under which this transmission mechanism working via internal capital markets in multinational banking becomes stronger, including subsidiaries’ ability to access alternative funding sources for lending, subsidiaries’ entry modes, and capital account openness and the banking market structure in host countries. There has been ample research on identifying specific channels of transmission of financial shocks across countries through global banking. The extant research has focused mostly on international trade, finance, and macroeconomic linkages as the fundamental determinants of this transmission. However, most of this line of research has used aggregate banking sector data (see, for example, Van Rijckeghem and Weder (2001) and Cetorelli and Goldberg (2010)). Only more recently, new research has started to use bank-level data. However, in most cases it has been done only as part of a specific country case study. For example, Peek and Rosengren, 1997 and Peek and Rosengren, 2000 examine how the financial crisis in Japan in the early 1990s affected lending by Japanese banks in the United States; and Cetorelli and Goldberg, 2011 and Cetorelli and Goldberg, 2012 provide evidence that global banks in the US activate internal capital markets, which contributes to the international propagation of shocks to lending by affiliated banks abroad. De Haas and Van Lelyveld (2010) examine the determinants of the credit growth of subsidiaries located mainly in developed countries during the period 1991–2004. They suggest the association of subsidiaries’ lending with the parent bank’s characteristics and the parents’ support for weak subsidiaries as evidence of the existence of internal capital markets. Using syndicated loan market data, Giannetti and Laeven, 2012a and Giannetti and Laeven, 2012b provide evidence that during banking crisis periods, syndicated loan lending banks rebalance their loan portfolio away from international markets toward domestic markets (a phenomenon which has been labeled the “flight home effect”), and thereby transmit negative shocks from the home country to the host country. In this paper we take a broader and bank-specific approach since we use bank-level data for 68 multinational banks from industrial countries and their 368 foreign subsidiaries operating in a total of 47 emerging and developing economies. Moreover, we focus on a related but different aspect, namely, whether foreign subsidiaries’ access to their parent bank’s internal funds plays any role on the degree of these subsidiaries’ dependence on their own internally generated funds for lending. The contribution we offer is that this measure of foreign subsidiaries’ reliance on their own internally generated funds, taking into account the effect of available funds from their parent bank for subsidiaries’ lending, provides convincing evidence that intra-bank internal capital markets work to transmit financial shocks, and that it represents more than just a simple association between the balance sheet of the parent bank and those of its subsidiaries. We do this by setting up a dynamic panel model of loan growth where we examine the impact of the parent bank’s internally generated funds on their foreign subsidiaries’ loan growth. We also investigate various properties of this internal capital market mechanism in multinational banking, and identify conditions under which this international transmission mechanism of financial shocks becomes stronger. The paper structure is as follows: Section 2 presents the model and describes the data and estimation methodology used in the paper. Section 3 reports and discusses the empirical results. In this section we also discuss various properties of the international transmission mechanism of financial shocks through internal capital markets in multinational banking. Section 4 explores conditions under which internal capital markets play a stronger role in transmitting financial shocks from parent banks to their foreign subsidiaries. Section 5 concludes.

Foreign subsidiaries of multinational banks often establish and use internal capital markets within the conglomerate to overcome the financial market frictions and informational asymmetries that they face in raising their own funds in host countries. Using internal capital markets, multinational banks are able to both shift risk and re-allocate revenues between the parent bank and its foreign subsidiaries or among the global network of branches and subsidiaries. Since the presence of foreign banks in emerging economies has increased rapidly in recent years, and since the banking industry has become more global, the importance of internal capital markets in multinational banking has grown, especially, in transmitting financial shocks within financial conglomerates, across global banks, and across countries. Using bank-level data from 1994 to 2008 on 368 subsidiaries of 68 multinational banks located in 47 emerging and developing countries, we present consistent evidence that intra-bank internal capital markets contribute to the transmission of financial shocks from parent banks in the home country to their foreign subsidiaries in host emerging market countries. We find that internal capital markets transmit both favorable and adverse shocks by affecting subsidiaries’ reliance on their own internal funds. We also find that this international transmission mechanism of financial shocks is varying in strength during tranquil periods vs. crisis periods; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; global rather than only regional; and more conspicuous in recent years than before 2001. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking becomes stronger. It does so as subsidiaries rely more heavily on their parent bank’s funds than on domestic deposits, as they enter host banking markets via a greenfield rather than M&A entry mode, as the host countries are more financially open, and as subsidiaries operate in less concentrated and more competitive host banking markets. Our main findings have useful policy implications. Bank regulators in emerging economies need to take into account the environment and conditions that we identify in this paper under which the international transmission of financial shocks via internal capital markets imperils the stability and efficiency of domestic banking markets. The instability is caused by transmitting adverse financial shocks from abroad. Specifically, regulators should pay special attention to foreign bank subsidiaries with higher loans-to-deposits ratios, to greenfield or de novo established subsidiaries, and to those operating in more financially open or in less concentrated host banking markets. This is particularly important in the midst of the recent global financial and banking crisis, during which many multinational banks headquartered in industrial countries are facing severe income and liquidity constraints. We also expect internal capital markets in multinational banking to play a role in transmitting business cycles across countries in the long run (see, for example, Olivero (2010) and Kalemli-Ozcan et al. (forthcoming)). The study of the long-run implications of multinational banking for the international transmission of financial shocks and business cycle comovement is left for future research.