Bank Subsidiaries Research Articles

The Determinants of Capital Structure: The Case of Moroccan Firms

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The distribution of the Capital Purchase Program funds: Evidence from bank internal capital markets

AbstractWe investigate the role played by the internal capital markets of bank holding companies in the distribution of the Capital Purchase Program funds to subsidiaries. We find that while all banks used a similar internal capital allocation to support their subsidiaries, program participants transferred more capital to their subsidiaries than nonparticipants. Smaller bank subsidiaries with lower capital and earnings received more capital than other subsidiaries. Our results support the argument that the distribution of capital was done in accordance with regulatory requirements that mandate bank holding companies to act as a source of strength for their subsidiaries.

Profit Shifting and the Tax Response of Multinational Banks in Eastern Europe

The aim of the paper is to measure the amount of profit shifting within the banking sector in Eastern European countries. The paper uses firm‑level bank data from the Bankscope database of multinational subsidiary banks operating in Eastern Europe for a period of 10 years (2006-2015). An empirical analysis is performed on the panel data to identify the profit‑shifting activities of these banks. Focusing on the banking sector of Eastern European countries, which are a microcosm of the European Union, substantial evidence of profit shifting is found and confirms that banks have enhanced tax‑planning opportunities similar to firms from different jurisdictions. The paper also seeks to contribute to recommendations on how fair and sustainable taxation and social policy reforms can increase the economic stability of the EU member states.

STRATEGIC MANAGEMENT OF TRANSNATIONAL BANKS IN THE INTERNATIONAL MARKET AFTER THE GLOBAL FINANCIAL CRISIS

The article identifies post-crisis determinants of strategic management of transnational banks in the market of direct investments by means of the correlation analysis of the dependence of growth of external assets of transnational banks of European countries on the indicators of profitability and financial stability of banking systems of the countries of placement of subsidiary banks, the efficiency of the transmission mechanism of monetary policy in these countries, the structure of a complex financial crisis and the speed of post-crisis recovery of the country, ease of doing business. There is no obvious connection between the presence of foreign banks in the banking system and indicators of profitability, ease of doing business and financial stability of banking systems. This is confirmed by the correlation analysis of 45 indicators on the example of 26 European countries for 2009–2011 (the period immediately after the end of the global financial crisis of 2008–2009). It is proved that in the post-crisis period, for transnational banks, the decision of increasing/decreasing the volume of assets in the banking system of the host country is dominated by: 1) the structure of a complex financial crisis; 2) the speed of post-crisis recovery of economies and banking systems of these countries; 3) the effectiveness of the transmission mechanism of monetary policy in these countries

Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment

In this study, using dynamic panel data, we investigated the influences of the home country economic environment and parent bank condition on the credit risk of foreign banks in Central and Eastern European (CEE) countries. We concentrated on the international transmission of credit risk through the internal capital market of multinational banks. Our theoretical assumptions follow studies that document how the parent bank condition and home country macroeconomic environment affect lending in subsidiaries in CEE countries. However, our results go one step further. We provide evidence that these relationships are reflected in subsidiaries’ credit risk in CEE countries. Our results suggest that the size and profitability of the parent bank have negative influences, while the liquidity and credit risk of the parent bank have positive influences on the subsidiaries’ credit risk. Moreover, the GDP growth in the parent bank’s country has a negative effect on the credit risk of the subsidiary, while the lending rate and liquidity in the parent bank country cause growth in the credit risk. These results indicate a new channel of international risk transfer from parent bank countries to host countries through foreign-owned banks.

COMPARATIVE ANALYSIS OF BANK STABILITY IN INDONESIA: A NON-PARAMETRIC APPROACH ON DIFFERENT BANKING MODELS

The present study, grounded in theory of financial intermediation, provides new empirical evidence on comparison of bank stability measures of Islamic banks, conventional banks and other bank models in Indonesia. Specifically, 72 conventional banks, 4 Islamic banks, 3 conventional banks with Islamic subsidiaries and 2 subsidiary Islamic banks in Indonesia are considered, focusing on the sample period of 1999-2015. The study adopts z-score as a measure of bank stability, while a non-parametric multiple comparison analysis was used to test the significance of the differences in the bank stability of the different bank models, namely Islamic banks, conventional banks, Subsidiary Islamic banks and conventional banks with Islamic subsidiaries. The sample period is further divided into three sub-periods, namely, before the global financial crisis (1999-2006), during the global financial crisis (2007-2009) and after the global financial crisis (2010-2015) so as to gain more detail findings on the impact of the global financial crisis on the banks’ stability. The impact of local crisis periods (1999-2001) on bank stability of different bank models is also investigated. Findings of this study contribute towards extending the theory of financial intermediation through empirical works of stability of different banking models namely Islamic banks, conventional banks, Subsidiary banks and conventional banks with Islamic subsidiaries.

Nationality Diversity of Bank Boards

AbstractThe aim of this paper is to carry out a comparative study for nationality diversity in bank boards. The study covers practices of board diversity of nine commercial banks. The data are compared for subsidiary banks in Bulgaria and their parent banks from the home country. The study defines a high degree of nationality diversity in subsidiary banks. The Bulgarian banks have a higher number of foreign members on boards compared to their parent banks. The good practices on board diversity in Bulgarian banks are a consequence of their subordination in European financial conglomerates and are aimed to reduce agent conflicts.

Harmonizing national options and discretions in the EU banking regulation

The European Central Bank strives to harmonize over 160 national options and discretions (O&Ds) that contribute to the fragmentation of banking union’s regulatory framework. National authorities seem prepared to accept it, despite previously insisting on the inclusion of all O&Ds into the EU legislation. We analyze a sample of O&D choices and their correspondence to cleavages pertinent to the political economy of EU banking. We find that the 11 post-communist member states use O&Ds more stringently to protect capital and liquidity in the local subsidiaries of foreign-own banks, which may complicate their potential opt-in to the banking union.

SYSTEMATIZATION OF THE EFFECTS THAT ARISE IN CONNECTION WITH THE EXPANSION OF TRANSNATIONAL BANK CAPITAL

Introduction. Openness to transnational financial flows is one of the most important indicators of the development of banking systems. The advocates of openness of banking systems for the entry of transnational banks as positive characteristics indicate increased competition in the banking sector, increased financial stability and efficiency, application of the newest management methods, diffusion of banking innovations, consolidation of both prudential standards and standards of regulation and supervision of banking activities. The purpose. The purpose of the article is to study the signs of globalization of financial space and the main forms of the presence of foreign banks in the territory of the host country and identify a set of risks and effects arising from the expansion of transnational bank capital. Results. The main consequences of the openness of banking systems for the expansion of transnational bank capital are investigated in the article. The main forms of the presence of foreign banks in the territory of the host country are identified, namely: representation of a foreign bank, a branch of a foreign bank, a bank with foreign participation and a subsidiary bank. The factors influencing the choice by a transnational bank of a certain organizational form of presence in foreign markets are determined. The differences in the behavior of branches of transnational banks and subsidiary banks in the financial markets of the host country are examined. A set of risks emerged in the case of the openness of the banking system and the presence of branches of transnational banks is identified. A set of effects generated by the expansion of transnational bank capital is investigated. Conclusions. The removal of barriers to capital flows must be coordinated with certain measures in macroeconomic policy. Failure to comply with this condition can lead to crisis phenomena, growth of external debt, especially short-term, and threaten the financial stability of the state.

Net Profit Margin Determinants of Islamic Subsidiaries of Conventional Banks in Malaysia

Net Profit Margin Determinants of Islamic Subsidiaries of Conventional Banks in Malaysia

Re-examine Performance of Foreign Banks in Indonesia

We reexamine the performance of multiple definitions of foreign banks in Indonesia over the period of September 2005-December 2013 in a monthly dataset. We use a number of definitions of foreign banks which are branches and subsidiaries of foreign banks (BSFB), joint venture banks (JVB) and domestic banks acquired by foreign investors (DBAFI). Unbalanced panel data estimation, more particular random effect, is employed to examine our hypothesis. We find that BSFB have a higher performance than other banks. However, little evidence is revealed for the joint venture and acquired banks. Encouraging banks, more particular domestic banks, to be more efficient should be bolstered by the regulators to lead them to be more profitable and competitive.

Risk Management of Full-Fledged Islamic Banks versus Islamic Subsidiaries of Conventional Banks in Malaysia : The Sustainable Growth within Restricted Minimum Requirements

This paper aims to analyze the risk management practices of full-fledged Islamic banks versus Islamic subsidiaries of conventional banks in Malaysia and thesustainable rate of growth within restricted minimum requirements of capital adequacy, leverage and liquidity. In achieving these objectives, the paper assessesthe risk management practices of full-fledged Islamic banks, i.e. Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad and Islamic subsidiaries ofconventional banks, i.e. Maybank Islamic Berhad and CIMB Islamic Berhad. This paper uses annual reports and focus group interview to obtain the data. Theresults of the analysis show that the Leverage Ratio, Liquidity Coverage Ratio (LCR) and capital requirement ratios, such as Common Equity Tier 1 capital Ratio, Core Capital Ratio (CCR) and Risk Weighted Capital Ratio (RWCR) have exceeded the minimum requirement by Basel Accord. The result of the focus group interview shows that full-fledged Islamic banks and Islamic subsidiaries of conventional banks conformed and implemented the risk management framework imposed by the regulatory agency. However, the growth rate in total asset, loan, Return On Assets (ROA) and net income margin has mixed growth except for loan to total asset which increase over the year, albeit of the minimum risk management requirement. These empirical and focus group results suggest an important policy on issues pertaining to how Islamic banks have to adjust the changes in the banking environment in terms of growth and its comparative advantages specifically on management efficiency.

The Impact of Financial Services Globalisation on Islamic and Conventional Bank Performance in GCC and MENA Countries

Empirical researches have shown that Islamic banks were more efficient than the conventional banks before, during and after global financial crises and were more resilient to negative profitability and speculation commonly identified with conventional banks despite that the former have grown as a result of globalisation of financial markets, product innovation, and delimitation of financial regulations, among others. However, the analyses of globalisation or internationalisation of financial services have concentrated only on the cross-border flow of portfolio investment in country stock markets, ignoring foreign direct investment and movement of financial services professionals. Using panel regressions to analyse the impact of financial services globalisation, the paper finds that net capital account used to measure the phenomenon has no significant impact on Islamic banks’ performance measured in terms of return on equity, return on asset and profit before tax. This may be due to the oft-cited limited patronage for Islamic banking in general. The policy implication suggests the need for an increased drive to popularise Islamic banking products in non-Islamic countries and for Islamic banks to more actively engage in cross-border trade of Islamic banking services as well as foreign direct investment in subsidiary banks outside their traditional locations. Key words: Financial services, globalisation, Islamic banks, GCC and MENA JEL Classification: G21, G24, G15

Twin Peaks and Central Banks: Economics, Political Economy and Comparative Analysis

One of the fundamental issue in implementing the twin peaks regime is deciding where the prudential supervisor should be housed, given that so far three options has been explored, i.e. the prudential supervisor could be outside the central bank, or be a subsidiary of the central bank, or be completely inside the central bank. In other words the key question is to define the central bank involvement in the twin peaks model. The aim of the chapter is twofold: first of all we offer a systematic review of the economics and politics of the central bank involvement in a twin peak regime. Therefore and secondly we analyse the central bank position in the countries that already adopted the twin peak model, in order to better understand how the general theoretical and empirical results already obtained in exploring the central bank involvement in supervision can be applied in analysing the actual twin peaks regimes. Analysing the establishment of the twin peaks regime in Australia, Belgium, the Netherlands, New Zealand and United Kingdom it has been confirmed the heterogeneity of the central bank involvement as prudential supervisor, and on average that two drivers seems to be relevant in motivating the incumbent policymakers in reforming their supervisory settings: the necessity to address and fix the consequences of a systemic crisis (crisis driver); the opportunity to implement a supervisory change when the share of peer countries undertaking reforms is higher (bandwagon driver). On this respect, the true outlier seems to the Australian case, where the relevance of the two drivers is completely absent. The inertia effect – i.e. lagged reform due to the risks in implementing it ‐ seems to be evident only in the UK case.

Cross-Border Effects of Regulatory Spillovers: Evidence from Mexico

I study the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan-demand by the non-tradable sector to changes in household credit supply range from 1.6–3.5. These results emphasize the potential for cross-border effects of regulations in the presence of global banks.

Harmonizing the EU Regulation in the Banking Union

The European Central Bank strives to harmonize over 160 national options and discretions (O&Ds) that contribute to the fragmentation of the banking union’s regulatory framework. National authorities seem prepared to accept it, despite previously insisting on the inclusion of all O&Ds into the EU legislation. We analyze a sample of O&D choices and their correspondence to cleavages pertinent to the political economy of EU banking. We find that the 11 post-communist member states use O&Ds more stringently to protect capital and liquidity in the local subsidiaries of foreign-own banks, which may complicate their potential opt-in to the banking union.

Transmission of liquidity shocks: Evidence on cross-border bank ownership linkages

This study examines whether a liquidity shock to a banking system could be transmitted to other economies through a network of bank ownership. Firstly we construct cross-border ownership networks for banks located in European countries. We then exploit the 2010 European debt crisis as a natural experiment. The analysis shows that subsidiary banks located outside of Greece, Ireland, Italy, Portugal and Spain (GIIPS) but with ownership linkages to these countries have a lower loan growth rate during the crisis period. This suggests that the liquidity shock experienced by GIIPS countries was indeed transmitted to those banks through ownership linkages. Larger subsidiary banks and those subsidiaries that were more profitable are found to be more resilient to the shock. We also find that the parent bank’s characteristics affect the transmission of the shock, supporting the notion of an internal capital market operating within these banks.

Bank Exposures and Sovereign Stress Transmission*

Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the determinants of banks’ sovereign exposures and their effects on lending during and after the crisis. Public, bailed-out and poorly capitalized banks responded to sovereign stress by purchasing domestic public debt more than other banks, consistent with both the “moral suasion” and the “carry trade” hypothesis. Public banks’ purchases grew especially in coincidence with the largest ECB liquidity injections, which therefore reinforced the “moral suasion” mechanism. Bank exposures significantly amplified the impact of sovereign stress on bank lending to domestic firms, as well as on lending by foreign subsidiaries of stressed-country banks to firms in non-stressed countries. Altogether, our evidence connects this amplification effect and its cross-border transmission to the moral suasion exerted by domestic governments on banks during the crisis.

Capital Structure Adjustments of Bank Holding Companies and Subsidiary Failure

A subsidiary failure may deteriorate the bank holding company’s (BHC) financial conditions. BHCs’ managers possess better knowledge than market investors concerning the likelihood of subsidiary failure, which gives rise to information asymmetry. We examine the effects of this information asymmetry on capital structure adjustments of BHCs in the periods surrounding subsidiary failure. We find that subsidiary failure significantly affects financial policies of the parent companies. Specifically, BHCs increase leverage ratio as early as one year prior to the failure of their subsidiaries, and substantially lower leverage after subsidiary failure. These capital structure adjustments are attributable to BHCs’ internal capital risk and most importantly, the information asymmetry between BHCs and the market.

Eliminating Conflicts of Interests in Banks: The Significance of the Volcker Rule

The gradual weakening and subsequent repeal of most provisions of the Glass-Steagall Act in 1999 allowed commercial banks to acquire investment banking subsidiaries, to grow substantially in size, and to access even more information through more diverse banking activities. At the same time, proprietary trading became a major source of revenue for the banks. The subsequent financial crisis of 2008 exposed another glaring weakness of banking in the post-Glass-Steagall era. Banks had grown too big, too risky and too interconnected, many surpassing trillions of dollars in assets, interbank loans and liabilities on and off balance sheet. The sheer size, risk and interconnectedness of banking alone raised concerns about systemically important and too-big-to-fail banks. After numerous attempts to bring back Glass-Steagall failed, Congress attempted to contain banking systemic banking risk by passing the Volcker rule to prohibit proprietary trading, and enacting consumer protection and other ring-fencing and fire-wall provisions in the Dodd-Frank Act. To test the potential importance of the Volcker Rule, we would need to know the amount of profits banks make from using proprietary adverse information about their clients. However, the source of the proprietary information banks use to execute their proprietary trading programs is typically confidential. Furthermore, banks do not disclose where and how they obtain this confidential information, which helps them create billions of dollars of profits every year. In this paper we investigate one possible source of this information. Specifically, we investigate the importance of the private information banks acquire as part of their financial intermediary and financial advisory role for their client firms. Banks often attain insider trading status and become subject to insider trading reporting requirements and trading restrictions when they are hired to provide financial advice to their client firms. When banks become temporary insiders, they must also report all of these trades executed on Forms 3, 4, and 5 alongside other legal insiders. Using this insider trading database, we demonstrate that banks can and do access important, private, material information about their clients and trade on this information. On average, the inside information that banks acquire and trade on is highly valuable, allowing the banks to earn more on 25% on their proprietary trades. Furthermore, we find that relaxation and elimination of the Glass-Steagall restrictions allowed the banks to trade more frequently and earn greater amount of abnormal profits. Since 2002, banks tend to trade and earn more than 40% abnormal profits from adverse information about their client firms. Consequently, we demonstrate that an added benefit of enforcement of the Volcker Rule would be to eliminate the incentives to trade on material, non-public information about their clients by eliminating proprietary trading by banks. Thus, we argue that enforcing the Volcker Rule would also help contain some the current conflicts of interest in the banking system resulting from the elimination of Glass-Steagall restrictions.