Funding Costs and Loan Pricing by Multinational Bank Affiliates
We conduct a theoretical and empirical investigation of the influence which the financial condition of a multinational bank group may have on the lending rates of its affiliates. We first propose a model of bank lending to risky clients in which the implicit opportunity costs of lending by a foreign bank affiliate are influenced by the abundance/scarcity of funds within the multinational conglomerate. The model predicts that parent banksâ€™ influence should be stronger in loan segments with more pronounced information asymmetry problems. We then formulate an empirical model of the spread charged by the affiliate to clients over the local interbank rate as a function of affiliate-level controls and a parent influence variable. This model is tested for three categories of commercial non-financial borrowers (domestically owned firms, foreign-owned firms and the self-employed) from the ten biggest banks in the Czech Republic under foreign control. Evidence of parent influence on lending spread is found in a limited number of cases of banks and borrower classes for which the constraint on fund flow within the parent bank group is likely to be tight, particularly when the borrower class is of strategic importance for the affiliateâ€™s overall performance. Therefore the parent bank influence probably is not a dominating factor in interest-rate setting on aggregate, but it can influence the cost of credit in borrower categories that are of major importance for the affiliate.
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- Alexis Derviz & Jiri Podpiera, 2006.
"Cross-Border Lending Contagion in Multinational Banks,"
2006/9, Czech National Bank, Research Department.
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"Internal Capital Markets and Lending by Multinational Bank Subsidiaries,"
13164, University Library of Munich, Germany.
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- Ehrmann, M. & Worms, A., 2001.
"Interbank Lending and Monetary Policy Transmission: Evidence for Germany,"
73, Quebec a Montreal - Recherche en gestion.
- Ehrmann, Michael & Worms, Andreas, 2001. "Interbank lending and monetary policy transmission: evidence for Germany," Discussion Paper Series 1: Economic Studies 2001,11, Deutsche Bundesbank, Research Centre.
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- Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
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