The Funding of Subsidiaries Equity, 'Double Leverage,' and the Risk of Bank Holding Companies (BHCs)

Abstract

“Double leverage” is the circumstance in which the parent company issues debt and acquires shares in the equity of the subsidiaries. We ask whether this type of intra-group financing has got an impact on the risk undertaken by Bank Holding Companies (BHCs). Our view is that, by double leveraging BHCs can exploit a shortfall in the balance sheet capital and are incentivized to assume more risk. Working on a large sample of United States BHCs we observe that the so-called “dou-ble leverage ratio” is positive correlated with risk-taking, while several tools do further suggest the existence of causality. Our outcomes are important for the stability of large banking groups, and give suggestions for a more effective monitoring of their activities.