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The Organization of Bank Affiliates; A Theoretical Perspective on Risk and Efficiency


  • Elisa Luciano


  • Clas Wihlborg



We analyze theoretically banks choice of organization and leverage in branches or subsidiaries in the presence of organizational and financial synergies, government bailouts, bankruptcy costs and varying correlations between risk-factors. The social efficiency of banks’ choices are analyzed as well taking into account operational synergies and distortions caused by banks’ exploitation of benefits of limited liability if there is a probability of governments bail-out. Leverage choice can be viewed as a trade-off between expected benefits of limited liability and bankruptcy costs. The choice of subsidiary vs branch organization can be viewed as a trade-off between organizational synergies and bankruptcy costs and this tradeoff depends on other factors mentioned. The theoretical and numerical analysis has a number of policy implications. We emphasize the role of capital requirements, explicit and implicit protection of banks’ creditors, restrictions on organizational choice with different synergies, insolvency procedures for banks affecting private and social costs associated with a bank’s insolvency

Suggested Citation

  • Elisa Luciano & Clas Wihlborg, 2013. "The Organization of Bank Affiliates; A Theoretical Perspective on Risk and Efficiency," ICER Working Papers 06-2013, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:06-2013

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    References listed on IDEAS

    1. Clas Wihlborg, 2012. "Developing Distress Resolution Procedures for Financial Institutions," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. Chiesa, Gabriella, 2008. "Optimal credit risk transfer, monitored finance, and banks," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 464-477, October.
    3. Adam B. Ashcraft, 2008. "Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 273-294, March.
    4. 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.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1669-1692, June.
    7. Castiglionesi, Fabio & Wagner, Wolf, 2013. "On the efficiency of bilateral interbank insurance," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 177-200.
    8. Sarig, Oded H., 1985. "On Mergers, Divestments, and Options: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(03), pages 385-389, September.
    9. Elisa Luciano & Giovanna Nicodano, 2008. "Intercorporate guarantees, leverage and taxes," Carlo Alberto Notebooks 95, Collegio Carlo Alberto, revised 2010.
    10. Giovanni Dell'Ariccia & Robert Marquez, 2010. "Risk and the Corporate Structure of Banks," Journal of Finance, American Finance Association, vol. 65(3), pages 1075-1096, June.
    11. Elisa Luciano & Giovanna Nicodano, 2012. "Default risk in business groups," Carlo Alberto Notebooks 283, Collegio Carlo Alberto.
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    More about this item


    bank subsidiaries; bank branches;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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