International spillover of bank liquidity shocks: Does organizational form of global banks matter?

We show that liquidity shocks to parent global banks trigger security sell-offs by their international branches – which rely on parent funding – but not by their international subsidiaries, which are independently capitalized and domestically funded. The evidence for liquidity shock-induced sales of securities by branches is stronger during financial crises and for branches facing tighter financial constraints. Consequently, the divestment of liquid securities by global banks is one possible channel for the international propagation of liquidity shocks, and such propagation depends on the organizational form of global banks. Our findings contribute to the ongoing regulatory debate (e.g., the U.S. ‘Intermediate Holding Company’ rule and the E.U. ‘Capital Requirements Directive and Regulation’ framework) regarding whether global banks should be required to operate as independently capitalized subsidiaries in host countries.