Working Paper: CEPR ID: DP12688
Authors: Gyongyi Loranth; Alan Morrison
Abstract: Multinational banks are increasingly subject to centralised supervision that relies upon precise aggregation and consolidation of risk data from all of their constituent parts. We present a model of organisational form for multinational bank expansion within which we can consider this trend. In our model, multinational banks design their corporate form so as to control the granularity of internal information flows. Genuine delegation to subsidiary banks is feasible because they report less precise information to home banks. Home banks can therefore use subsidiary expansion to commit ex ante to accept projects that may ex post be unattractive. That commitment comes at the cost of higher expected compensation costs; branch banks guarantee better information flows and so allow for more precise incentive contracts. Centralization of supervision mitigates the benefit of subsidiaries for the home bank and may result in credit rationing to small and medium-sized companies in host countries. Our model explains the closer engagement of subsidiaries in host countries and yields several testable implications.
Keywords: multinational banks; branch; subsidiary; information flows
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multinational banks design their corporate structure to optimize internal information flows (F23) | the choice between branch and subsidiary forms directly affects the granularity of information shared with home banks (G21) |
| the choice between branch and subsidiary forms directly affects the granularity of information shared with home banks (G21) | genuine delegation to subsidiary banks is feasible because they report less precise information to home banks (E58) |
| genuine delegation to subsidiary banks is feasible because they report less precise information to home banks (E58) | home banks can commit ex ante to accept projects that may be unattractive ex post (G21) |
| the centralization of supervision can mitigate the benefits of subsidiaries (L22) | credit rationing for small and medium-sized enterprises (SMEs) in host countries (G21) |
| the choice of corporate structure influences the quality of loans made (G32) | subsidiaries potentially lead to lower average loan quality due to their engagement with marginal projects (G32) |
| the forced adoption of a particular mode of entry, such as branch banking (G21) | adverse outcomes, including credit rationing and reduced welfare in the host country (F65) |