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Cross-Border Risk Transmission by a Multinational Bank

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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 & Loranth, Gyongyi, 2005. "Regulation of multinational banks: a theoretical inquiry," Working Paper Series 0431, European Central Bank.
  2. Kulpmann, Mathias, 2000. "Incentives in an international bank," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 481-493, December.
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  4. Douglas W. Diamond & Raghuram G. Rajan, . "A Theory of Bank Capital," CRSP working papers 363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Holthausen, Cornelia & Rønde, Thomas, 2004. "Cooperation in international banking supervision," Working Paper Series 0316, European Central Bank.
  6. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  7. 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.
  8. Kenneth A. Froot & Jeremy C. Stein, 1996. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach," NBER Working Papers 5403, National Bureau of Economic Research, Inc.
  9. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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  11. Rafael Repullo, 2002. "Capital requirements, market power, and risk-taking in banking," Proceedings 809, Federal Reserve Bank of Chicago.
  12. Lóránth, Gyöngyi & Morrison, Alan, 2003. "Multinational Bank Regulation with Deposit Insurance and Diversification Effects," CEPR Discussion Papers 4148, C.E.P.R. Discussion Papers.
  13. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
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Cited by:
  1. Kateřina Tsolov, 2005. "ADR/GDR Potential in Central Europe," Working Papers IES 92, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  2. 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, vol. 1(1), pages 67-86, March.
  3. Tomáš Cahlík & Tomáš Honzák & Jana Honzáková & Marcel Jiřina & Natálie Reichlová, 2005. "Convergence of Consumption Structure," Working Papers IES 99, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  4. 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, vol. 1(1), pages 54-66, March.
  5. Jan Kodera & Miroslav Vošvrda, 2005. "Production, Capital Stock and Price Dynamics in a Simple Model of Closed Economy," Working Papers IES 93, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.

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