DP12688 | The corporate structure of multinational banks

Publication Date

02/05/2018

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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.