Internal capital markets and bank holding company efficiency

Bank Holding Companies and in particular their internal capital markets have been widely discussed in recent financial literature. The financial crisis especially brought regulatory intervention in financial markets into question. Empirical evidence suggests that bank holding companies have clear preferences for double leverage, which are not based on unambiguous and explicit economic foundations. In this article, we analyze the effects of equity, debt and double leverage on the efficiency of bank holding companies. We show that Bank Holding Company efficiency is negatively affected by equity financing from parents to subsidiaries and this effect is even more pronounced in case of double leveraging. Our findings indicate that further measures from regulators are necessary in order to prevent inefficient financing via double leverage, which may be used to circumvent regulatory capital requirements.