Foreign Bank Subsidiaries’ Default Risk during the Global Crisis: What Factors Help Insulate Affiliates from their Parents?

By Deniz Anginer, Eugenio M Cerutti, Maria Soledad Martinez Peria

June 8, 2016

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Deniz Anginer, Eugenio M Cerutti, and Maria Soledad Martinez Peria. Foreign Bank Subsidiaries’ Default Risk during the Global Crisis: What Factors Help Insulate Affiliates from their Parents?, (USA: International Monetary Fund, 2016) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the association between the default risk of foreign bank subsidiaries in developing countries and their parents during the global financial crisis, with the purpose of determining the size and sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from their parents. We find evidence of a significant and robust positive correlation between parent banks’ and foreign subsidiaries’ default risk. This correlation is lower for subsidiaries that have a higher share of retail deposit funding and that are more independently managed from their parents. Host country bank regulations also influence the extent to which shocks to the parents affect the subsidiaries’ default risk. In particular, the correlation between the default risk of subsidiaries and their parents is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements, and tougher restrictions on bank activities.

Subject: Bank regulation, Bank supervision, Banking, Debt default, External debt, Financial institutions, Financial markets, Financial regulation and supervision, Foreign banks, Stock markets

Keywords: Asset value, Banco Continental-BBVA Banco Continental, Bank regulation, Bank subsidiaries, Bank supervision, Banking crises, BNP Paribas, Debt default, Default risk, Distance to default, Foreign banks, Global, Host country bank regulation, Merton distance, Merton model, Parent bank, Ring-fencing, Solvency deterioration, Stock markets, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/109
Stock No:

WPIEA2016109
ISBN:

9781484382189
ISSN:

1018-5941

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