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Cross-Border Risk Transmission by a Multinational Bank

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Abstract

A model of international banking, with a stress on manager human-capital (borrower monitoring) and majority-shareholder human capital (manager auditing) is constructed to study the impact of exogenous shocks in one country on credit creation in another. I show that the presence of the two cited categories of non-transferable skills in banking technology reduces the role of the standard portfolio-diversification motive in the cross-border transmission of disturbances. At the same time, this bank-specific market friction creates a separate channel of shock propagation, a function of bank shareholder and manager incentives. It can even happen that the impact of an exogenous shock on credit has a different sign in the “relationship” as opposed to the “arm’s-length” banking environment. This phenomenon, caused by the marginal effect of the human-capital management in the bank operation, is present in those bank branches with relatively small loan volumes. When the loan volume is large, the direction of the reaction of the manager-auditing bank to shocks abroad is the same as that of an arm’s-length lender.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal AUCO Czech Economic Review.

Volume (Year): 1 (2007)
Issue (Month): 1 (March)
Pages: 87-111

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Handle: RePEc:fau:aucocz:au2007_087

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Keywords: multinational bank; managerial effort; audit; credit; foreign shock;

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  1. Calzolari, Giacomo & Lóránth, Gyöngyi, 2004. "Regulation of Multinational banks: A Theoretical Inquiry," CEPR Discussion Papers 4232, C.E.P.R. Discussion Papers.
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  3. Cyril Monnet & Erwan Quintin, 2005. "Why do financial systems differ? History matters," 2005 Meeting Papers 275, Society for Economic Dynamics.
  4. Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers 4148, C.E.P.R. Discussion Papers.
  5. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
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  7. Kulpmann, Mathias, 2000. "Incentives in an international bank," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 481-493, December.
  8. Repullo, Rafael, 2003. "Capital Requirements, Market Power and Risk-Taking in Banking," CEPR Discussion Papers 3721, C.E.P.R. Discussion Papers.
  9. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
  10. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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  13. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
  14. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
  15. Chan-Lau, Jorge A & Chen, Zhaohui, 2002. "A Theoretical Model of Financial Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 53-63, February.
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Cited by:
  1. Kateřina Tsolov, 2005. "ADR/GDR Potential in Central Europe," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 92, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  2. Tomáš Cahlík & Tomáš Honzák & Jana Honzáková & Marcel Jiřina & Natálie Reichlová, 2005. "Convergence of Consumption Structure," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 99, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  3. Jan Kodera & Miroslav Vošvrda, 2005. "Production, Capital Stock and Price Dynamics in a Simple Model of Closed Economy," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 93, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  4. Adam Geršl, 2007. "Political Economy of Public Deficit: Perspectives for Constitutional Reform," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 67-86, March.
  5. Miloslav Vošvrda & Lukáš Vácha, 2007. "Heterogeneous Agents Model with the Worst Out Algorithm," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 54-66, March.

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