Risk and the Corporate Structure of Banks

IMF Working Papers, February 1, 2010

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Risk and the Corporate Structure of Banks

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Bibliographic details

• Published: February 1, 2010
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451962901.001

Summary findings

• Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability.
• Subsidiary-based structures are more exposed to the risk of capital expropriation than are branches.
• Branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa.
• Greater cross-country risk correlation reduces the differences between subsidiary- and branch-based structures.
• More accurate pricing of risk by investors reduces the differences between the two structures.
• The corporate structure affects bank risk taking and affiliate size.

Analytical insights and mechanisms

• Limited liability at the affiliate level (subsidiaries) mitigates economic risk exposure for parent banks expanding into new markets.
• Capital expropriation risk operates in the opposite direction: subsidiaries face higher expropriation risk compared with branches.
• The relative magnitudes of economic risk and expropriation risk determine the preferred corporate form for market entry.
• Cross-country risk correlation and investor risk pricing influence the comparative advantage of branches versus subsidiaries by narrowing structural differences.

Subjects and keywords (as listed)

• Subjects: Bank credit, Banking, Credit risk, Financial institutions, Financial regulation and supervision, Foreign banks, Loans, Money, Organizational structure of revenue administration, Revenue administration
• Keywords: Bank branches, Bank credit, bank liability, branch structure, Credit risk, creditors price risk, Eastern Europe, endogenize bank risk taking, Foreign banks, limited liability, Loans, Organizational structure of revenue administration, parent bank, risk-taking incentive, subsidiaries, subsidiary structure, Western Europe, WP

Content in this bundle

• _wp1040 — Organizational Form of Banks’ Foreign Operations
  • _wp1040 — Organizational Form of Banks’ Foreign Operations (Markdown version)
  • _wp1040 — Organizational Form of Banks’ Foreign Operations (PDF)