LENDING BEHAVIOR OF MULTINATIONAL BANK AFFILIATES

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Abstract

We study the parent influence on lending by affiliates of a multinational bank. In the proposed theoretical model, local lending is influenced by shareholder-affiliate manager delegation and precautionary motives. The outcome is either contagion (the loan volume in the affiliate follows the direction of the parent bank country shock) or performance-based reallocation of funds (substitution), depending on the degree of manager delegation in the affiliate and the liquidity-sensitivity in the parent bank. Empirical investigation, deliberately conducted on a sample not covering the latest financial crisis, shows that also in “normal” times, multinational banks that are likely to delegate lending decisions or be more liquidity-sensitive are more inclined towards contagionist behavior.

Keywords: Multinational bank; Delegation; Agency; Substitution; Contagion

How to cite this paper: Derviz, A., & Podpiera, J. (2011). Lending behavior of multinational bank affiliates. Risk Governance and Control: Financial Markets & Institutions, 1(1), 19-36. https://doi.org/10.22495/rgcv1i1art2