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The Organization of Bank Affiliates; A Theoretical Perspective on Risk and Efficiency

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  • Elisa Luciano

    ()

  • Clas Wihlborg

    ()

Abstract

We analyze theoretically banks choice of organization and leverage in branches or subsidiaries in the presence of organizational and financial synergies, government bailouts, bankruptcy costs and varying correlations between risk-factors. The social efficiency of banks’ choices are analyzed as well taking into account operational synergies and distortions caused by banks’ exploitation of benefits of limited liability if there is a probability of governments bail-out. Leverage choice can be viewed as a trade-off between expected benefits of limited liability and bankruptcy costs. The choice of subsidiary vs branch organization can be viewed as a trade-off between organizational synergies and bankruptcy costs and this tradeoff depends on other factors mentioned. The theoretical and numerical analysis has a number of policy implications. We emphasize the role of capital requirements, explicit and implicit protection of banks’ creditors, restrictions on organizational choice with different synergies, insolvency procedures for banks affecting private and social costs associated with a bank’s insolvency

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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 06-2013.

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Length: 42 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:icr:wpicer:06-2013

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Keywords: bank subsidiaries; bank branches;

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References

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  1. International Monetary Fund, 2010. "Risk and the Corporate Structure of Banks," IMF Working Papers 10/40, International Monetary Fund.
  2. Jeon, Bang & Olivero, María & Wu, Ji, 2012. "Multinational Banking and the International Transmission of Financial Shocks: Evidence from Foreign Bank Subsidiaries," School of Economics Working Paper Series 2012-2, LeBow College of Business, Drexel University.
  3. Xavier Freixas & Gyöngyi Lóránth & Alan D. Morrison, 2005. "Regulating financial conglomerates," Economics Working Papers 820, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Chiesa, Gabriella, 2008. "Optimal credit risk transfer, monitored finance, and banks," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 464-477, October.
  5. Adam B. Ashcraft, 2008. "Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 273-294, 03.
  6. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2005. "How banks go abroad : branches or subsidiaries ?," Policy Research Working Paper Series 3753, The World Bank.
  7. Castiglionesi, Fabio & Wagner, Wolf, 2013. "On the efficiency of bilateral interbank insurance," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 177-200.
  8. Sarig, Oded H., 1985. "On Mergers, Divestments, and Options: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(03), pages 385-389, September.
  9. Clas Wihlborg, 2012. "Developing Distress Resolution Procedures for Financial Institutions," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  10. Charles M. Kahn & Andrew Winton, 2002. "Moral hazard and optimal subsidiary structure for financial institutions," Proceedings 808, Federal Reserve Bank of Chicago.
  11. Elisa Luciano & Giovanna Nicodano, 2008. "Intercorporate guarantees, leverage and taxes," Carlo Alberto Notebooks 95, Collegio Carlo Alberto, revised 2010.
  12. Elisa Luciano & Giovanna Nicodano, 2012. "Default risk in business groups," Carlo Alberto Notebooks 283, Collegio Carlo Alberto.
  13. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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