IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v39y2021i2p163-177.html

Internal capital markets and bank holding company efficiency

Author

Listed:
  • Silvia Bressan
  • Margarethe Rammerstorfert
  • Karl Weinmayer

Abstract

Bank Holding Companies and in particular their internal capital markets have been widely discussed in recent financial literature. The financial crisis especially brought regulatory intervention in financial markets into question. Empirical evidence suggests that bank holding companies have clear preferences for double leverage, which are not based on unambiguous and explicit economic foundations. In this article, we analyze the effects of equity, debt and double leverage on the efficiency of bank holding companies. We show that Bank Holding Company efficiency is negatively affected by equity financing from parents to subsidiaries and this effect is even more pronounced in case of double leveraging. Our findings indicate that further measures from regulators are necessary in order to prevent inefficient financing via double leverage, which may be used to circumvent regulatory capital requirements.

Suggested Citation

  • Silvia Bressan & Margarethe Rammerstorfert & Karl Weinmayer, 2021. "Internal capital markets and bank holding company efficiency," Review of Financial Economics, John Wiley & Sons, vol. 39(2), pages 163-177, April.
    • Handle: RePEc:wly:revfec:v:39:y:2021:i:2:p:163-177
    DOI: 10.1002/rfe.1116
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.1116
    Download Restriction: no
    File URL: https://libkey.io/10.1002/rfe.1116?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peter Bogetoft & Jens Hougaard, 1999. "Efficiency Evaluations Based on Potential (Non-Proportional) Improvements," Journal of Productivity Analysis, Springer, vol. 12(3), pages 233-247, November.
    2. Tarun Mukherjee & Elisabeta Pana, 2018. "The distribution of the Capital Purchase Program funds: Evidence from bank internal capital markets," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 27(4), pages 125-143, November.
    3. Randall Pozdena, 1986. "Leverage and double leverage in banking," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun20.
    4. Barbara Casu & Philip Molyneux, 2003. "A comparative study of efficiency in European banking," Applied Economics, Taylor & Francis Journals, vol. 35(17), pages 1865-1876.
    5. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
    6. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
    7. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    8. Meyer, Margaret & Milgrom, Paul & Roberts, John, 1992. "Organizational Prospects, Influence Costs, and Ownership Changes," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 9-35, Spring.
    9. Mester, Loretta J., 1993. "Efficiency in the savings and loan industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 267-286, April.
    10. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
    11. Mette Asmild & Jens Hougaard & Dorte Kronborg & Hans Kvist, 2003. "Measuring Inefficiency Via Potential Improvements," Journal of Productivity Analysis, Springer, vol. 19(1), pages 59-76, January.
    12. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
    13. Dierick, Frank, 2004. "The supervision of mixed financial services groups in Europe," Occasional Paper Series 20, European Central Bank.
    14. Elyas Elyasiani & Yong Wang, 2012. "Bank holding company diversification and production efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 22(17), pages 1409-1428, September.
    15. Silvia Bressan, 2016. "Taxation And Leverage Inside Bank Holding Companies," Accounting & Taxation, The Institute for Business and Finance Research, vol. 8(1), pages 27-37.
    16. 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.
    17. Hyun-Han Shin & René M. Stulz, 1998. "Are Internal capital Markets Efficient?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 531-552.
    18. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    19. Frank Dierick, 2004. "The supervision of mixed financial services groups in Europe," Occasional Paper Series 20, European Central Bank.
    20. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    21. Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 254-282, February.
    22. Yoo, Y. Emilie, 2010. "Capital adequacy regulation of financial conglomerates in the European Union," IMFS Working Paper Series 37, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    23. Lamont, Owen, 1997. "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    24. Silvia Bressan, 2017. "Effects from the parent’s exposure to subsidiaries inside Bank Holding Companies (BHCs)," Journal of Banking Regulation, Palgrave Macmillan, vol. 18(2), pages 132-148, April.
    25. Stein, Jeremy C, 1997. "Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-133, March.
    26. Harris, Oneil & Huerta, Daniel & Ngo, Thanh, 2013. "The impact of TARP on bank efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 85-104.
    27. Drew Dahl & Ronald Shrieves & Michael Spivey, 2002. "Financing Loan Growth at Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 189-202, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Margarethe Rammerstorfer & Karl Weinmayer, 2025. "Efficiency of socially responsible investments in the context of portfolio management," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 47(4), pages 1455-1492, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi, 2010. "Multinational banking in Europe – financial stability and regulatory implications: lessons from the financial crisis [Cross subsidies, external financing constraints, and the contribution of the internal capital market to firm value]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(64), pages 703-753.
    2. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.
    3. Garam Ahn & Frederick Dongchuhl Oh & Junghum Park, 2020. "The Efficiency of Financial Holding Companies in Korea," Korean Economic Review, Korean Economic Association, vol. 36, pages 29-58.
    4. Nguyen, Thi Lam Anh, 2018. "Diversification and bank efficiency in six ASEAN countries," Global Finance Journal, Elsevier, vol. 37(C), pages 57-78.
    5. Ly, Kim Cuong & Liu, Frank Hong & Opong, Kwaku, 2018. "Can parents protect their children? Risk comparison analysis between affiliates of multi- and single-bank holding companies," Journal of Financial Stability, Elsevier, vol. 37(C), pages 1-10.
    6. Dmytro Holod & Joe Peek, 2010. "Capital Constraints, Asymmetric Information, and Internal Capital Markets in Banking: New Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 879-906, August.
    7. Ly, Kim Cuong & Shimizu, Katsutoshi, 2018. "Funding liquidity risk and internal markets in multi-bank holding companies: Diversification or internalization?," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 77-89.
    8. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    9. Cestone, Giacinta & Fumagalli, Chiara, 2001. "Internal Capital Markets, Cross-Subsidization and Product Market Competition," CEPR Discussion Papers 2935, Centre for Economic Policy Research.
    10. Paola Brighi & Valeria Venturelli, 2013. "The Effect Of Revenue And Geographic Diversification On Bank Performance," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0043, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    11. Giacinta Cestone & Chiara Fumagalli, 2003. "Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups," CSEF Working Papers 93, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    12. Ly, Kim Cuong & Liu, Hong & Opong, Kwaku, 2017. "Who acquires whom among stand-alone commercial banks and bank holding company affiliates?," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 144-158.
    13. Philip G. Berger & Rebecca Hann, 2003. "The Impact of SFAS No. 131 on Information and Monitoring," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 41(2), pages 163-223, May.
    14. Bai, Min & Fu, Yumei & Sun, Mingwei, 2023. "Corporate diversification and labor investment efficiency: Evidence from China," Economic Modelling, Elsevier, vol. 127(C).
    15. Curi, Claudia & Lozano-Vivas, Ana & Zelenyuk, Valentin, 2015. "Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all?," Journal of Banking & Finance, Elsevier, vol. 61(S1), pages 22-35.
    16. Ranjan D’Mello & Xinghua Gao & Yonghong Jia, 2017. "Internal control and internal capital allocation: evidence from internal capital markets of multi-segment firms," Review of Accounting Studies, Springer, vol. 22(1), pages 251-287, March.
    17. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2013. "Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 952-972.
    18. Bang Nam Jeon & Ji Wu & Limei Chen & Minghua Chen, 2020. "Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies," School of Economics Working Paper Series 2020-10, LeBow College of Business, Drexel University.
    19. Raykov, Radoslav & Silva-Buston, Consuelo, 2020. "Holding company affiliation and bank stability: Evidence from the US banking sector," Journal of Corporate Finance, Elsevier, vol. 65(C).
    20. Boutin, Xavier & Cestone, Giacinta & Fumagalli, Chiara & Pica, Giovanni & Serrano-Velarde, Nicolas, 2013. "The deep-pocket effect of internal capital markets," Journal of Financial Economics, Elsevier, vol. 109(1), pages 122-145.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:39:y:2021:i:2:p:163-177. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.