Cross-border banking, intragroup exposures and risk-taking

Regulatory limits on intragroup exposures constrain capital allocation within multi-national banking groups. We develop a theoretical model of cross-border banking that captures internal capital markets under supranational supervision and borrowing constraints. Our analysis shows that relaxing intragroup exposure limits can amplify risk-taking by enabling parent banks to draw on affiliate resources and reallocate risk toward the home market, particularly when foreign affiliates are large, well capitalized, and subject to weaker liquidity requirements. We characterize the conditions under which this channel operates and discuss its implications for financial stability. Our findings inform the debate on multinational banking groups by showing how risks can emerge within these organizations and how regulatory tools can mitigate them.