To Branch or not to Branch? A Quantitative Evaluation of the Consequences of Global Banks’ Organization

This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks and their parents are systematically larger than foreign branches and their parents, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. To explain these facts, we develop a structural model global banking whose assumptions mimic the institutional details of the regulatory framework in the US. The model sheds light on the relationship between market access, regulation, and capital flows, and is used as a laboratory to perform counterfactual analysis on the effects of alternative regulatory policies.