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Multinational Banking in Europe: Financial Stability and Regulatory Implications. Lessons from the Financial Crisis

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  • Giorgio Barba Navaretti

    (University of Milan and Centro Studi Luca d’Agliano)

  • Giacomo Calzolari

    (University of Bologna, CEPR and Centro Studi Luca d’Agliano)

  • Alberto Franco Pozzolo

    (University of Molise, Centro Studi Luca d’Agliano and MoFiR)

  • Micol Levi

    (Centro Studi Luca d’Agliano)

Abstract

This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks‟ foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates have been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks‟ internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups‟ affiliates, compared to standing alone national banks.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 292.

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Length: 44
Date of creation: 30 Apr 2010
Date of revision: 30 Apr 2010
Handle: RePEc:csl:devewp:292

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Keywords: multinational banking; financial stability; regulation and supervision; internal capital markets; financial crises;

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References

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