Working Paper: NBER ID: w17355
Authors: Nicola Cetorelli; Linda S. Goldberg
Abstract: The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is through how these banks manage liquidity across their entire banking organization. We document that funds regularly flow between parent banks and their affiliates in diverse foreign markets. We use the Great Recession as an opportunity to identify the balance sheet shocks to parent banks in the United States, and then explore which foreign affiliate features are associated with those businesses being protected, for example their status as important locations in sourcing funding or as destinations for foreign investment activity. We show that distance from the parent organization lays a significant role in this allocation, where distance is bank-affiliate specific and depends on the ex ante relative importance of such locations as local funding pools and in their overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission.
Keywords: Liquidity management; Global banks; Internal capital markets; Great Recession
JEL Codes: F3; G15; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parent bank funding shock (G21) | Reallocation of internal liquidity (E51) |
| Reallocation of internal liquidity (E51) | Allocation of internal capital across foreign affiliates (F21) |
| Distance from parent organization (L39) | Allocation of internal capital (G31) |
| Reliance on local funding pools (H70) | Drawing internal funds from affiliates during a shock (F65) |
| Core locations (R32) | More support to parent organization (L39) |
| Patterns of liquidity management (E41) | Understanding international shock transmission (F42) |