Risk and the Corporate Structure of Banks

We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary‐based corporate structures benefit from greater protection against economic risk because of affiliate‐level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch‐based structures are preferred to subsidiary‐based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross‐country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, a bank's corporate structure affects its risk taking and affiliate size.