The Internal Organization of Banks and the Transmission of Lending Shocks Across Borders

The internal organization of global banks potentially plays a vital role in the transmission of shocks both within and across borders. The analysis of this transmission is of importance for regulators and policy makers. In this paper, we investigate how solvency and wholesale funding shocks to 114 OECD parent banks affect the lending of 541 domestic and foreign subsidiaries. Our results suggest that wholesale shocks are more important than solvency shocks in governing the lending decisions of bank subsidiaries. We also find stronger negative effects of wholesale shocks on the lending of foreign subsidiaries relative to domestic subsidiaries. Furthermore, both types of shocks appear to be independent from each other. Finally, the foreign subsidiaries of banks that rely heavily on wholesale funding seem to be more vulnerable to wholesale shocks to their parents than their domestic counterparts. There is no significance difference in the lending practices of subsidiaries of undercapitalized versus well-capitalized parents. These findings suggest that regulatory capital requirements may have small impact on limiting the transmission of shocks across borders.