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Internal Capital Markets in Multinational Banks: Implications for European Transition Countries

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  • Ralph de Haas
  • Ilko Naaborg

Abstract

We use focused interviews with bank managers to analyse how multinational banks use internal capital markets to control their subsidiaries. It is found that foreign bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. Parent banks generally set credit growth targets, which may then be supported by book capital and debt funding. This passive approach establishes a minimum amount of local book capital and is driven by regulatory considerations. In addition, some banks have started to use semi-active economic capital models. By charging subsidiaries for the use of economic capital, parent banks introduce a constraint at the individual loan level. This bottom-up approach determines the pace at which subsidiaries are able to meet their credit growth targets. Our findings suggest that the credit growth of subsidiaries may critically depend on the financial position of the parent bank.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 051.

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Date of creation: Aug 2005
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Handle: RePEc:dnb:dnbwpp:051

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Keywords: foreign banks; transition economies; internal capital markets;

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References

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  8. Houston, Joel F. & James, Christopher, 1998. "Do bank internal capital markets promote lending?," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 899-918, August.
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Citations

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Cited by:
  1. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 0748, European Central Bank.
  2. Olena Havrylchyk & Emilia Jurzyk, 2006. "Profitability of foreign and domestic banks in Central and Eastern Europe: does the mode of entry matter?," LICOS Discussion Papers 16606, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  3. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2011. "Financial dollarization: The role of foreign-owned banks and interest rates," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 794-806, April.
  4. Ralph de Haas & Iman van Lelyveld, 2003. "Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis," DNB Staff Reports (discontinued) 109, Netherlands Central Bank.
  5. Havrylchyk, Olena & Jurzyk, Emilia, 2006. "Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter?," BOFIT Discussion Papers 5/2006, Bank of Finland, Institute for Economies in Transition.
  6. Konstantins Benkovskis, 2008. "Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data," Working Papers 2008/01, Latvijas Banka.
  7. Claessens, Stijn, 2006. "Competitive implications of cross-border banking," Policy Research Working Paper Series 3854, The World Bank.
  8. Michael Boss & Martin Fenz & Johannes Pann & Claus Puhr & Martin Schneider & Eva Ubl, 2009. "Modeling Credit Risk through the Austrian Business Cycle: An Update of the OeNB Model," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17, pages 85-101.

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