Working Paper: NBER ID: w25203
Authors: Jos L. Fillat; Stefania Garetto; Arthur V. Smith
Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis.In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the rganizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
Keywords: global banks; banking regulation; shock transmission
JEL Codes: F12; F23; F36; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Organizational structure of banks (branches vs. subsidiaries) (L22) | response to financial crises (G01) |
| Branches (Y80) | susceptibility to funding shocks (E44) |
| Subsidiaries (L22) | resilience to external shocks (F41) |
| Internal capital market frictions (G19) | differences in asset stability (G32) |
| Regulatory measures (higher capital requirements or elimination of branching) (G28) | mitigation of negative effects on U.S. lending (F65) |