Funding Costs and Loan Pricing by Multinational Bank Affiliates
AbstractWe conduct a theoretical and empirical investigation of the influence which the financial condition of a multinational bank group may have on the lending rates of its affiliates. We first propose a model of bank lending to risky clients in which the implicit opportunity costs of lending by a foreign bank affiliate are influenced by the abundance/scarcity of funds within the multinational conglomerate. The model predicts that parent banksâ€™ influence should be stronger in loan segments with more pronounced information asymmetry problems. We then formulate an empirical model of the spread charged by the affiliate to clients over the local interbank rate as a function of affiliate-level controls and a parent influence variable. This model is tested for three categories of commercial non-financial borrowers (domestically owned firms, foreign-owned firms and the self-employed) from the ten biggest banks in the Czech Republic under foreign control. Evidence of parent influence on lending spread is found in a limited number of cases of banks and borrower classes for which the constraint on fund flow within the parent bank group is likely to be tight, particularly when the borrower class is of strategic importance for the affiliateâ€™s overall performance. Therefore the parent bank influence probably is not a dominating factor in interest-rate setting on aggregate, but it can influence the cost of credit in borrower categories that are of major importance for the affiliate.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2009/9.
Date of creation: Dec 2009
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Bank loan pricing; internal capital market; multinational banks.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
- NEP-BAN-2010-09-11 (Banking)
- NEP-IFN-2010-09-11 (International Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alexis Derviz & Jiri Podpiera, 2006.
"Cross-Border Lending Contagion in Multinational Banks,"
2006/9, Czech National Bank, Research Department.
- Alexis Derviz & Jirí Podpiera, 2007. "Cross-border lending contagion in multinational banks," Working Paper Series 807, European Central Bank.
- De Haas, Ralph & van Lelyveld, Iman, 2009.
"Internal Capital Markets and Lending by Multinational Bank Subsidiaries,"
13164, University Library of Munich, Germany.
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- Ralph de Haas & Iman van Lelyveld, 2006. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," DNB Working Papers 101, Netherlands Central Bank, Research Department.
- Ralph De Haas & Iman Van Lelyveld, 2008. "Internal capital markets and lending by multinational bank subsidiaries," Working Papers 105, European Bank for Reconstruction and Development, Office of the Chief Economist.
- Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
- Alexis Derviz & Marie Raková, 2012. "Parent Influence On Loan Pricing By Czech Banks," Prague Economic Papers, University of Economics, Prague, vol. 2012(4), pages 434-499.
- repec:prg:jnlpep:v:2013:y:2013:i:4:id:433:p:434-499 is not listed on IDEAS
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