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

Author

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  • Vukan Vujic

    (Central European University)

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.

Suggested Citation

  • Vukan Vujic, 2015. "Internal capital markets and crisis transmission: evidence from foreign bank subsidiaries in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 39-56.
    • Handle: RePEc:onb:oenbfi:y:2015:i:3:b:3
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    More about this item

    Keywords

    deleveraging; multinational banks; related party transactions;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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