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

Deniz Anginer, Eugenio Cerutti and Maria Martinez Peria

No 2016/109, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; parent bank; BNP Paribas; asset value; solvency deterioration; Banking crises; default risk; ring-fencing; bank subsidiaries; distance to default; Merton model; Banco Continental-BBVA Banco Continental; Merton distance; host country bank regulation; Foreign banks; Debt default; Bank regulation; Stock markets; Bank supervision; Global (search for similar items in EconPapers)
Pages: 31
Date: 2016-06-08
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Foreign bank subsidiaries' default risk during the global crisis: What factors help insulate affiliates from their parents? (2017)
Working Paper: Foreign bank subsidiaries'default risk during the global crisis: what factors help insulate affiliates from their parents ? (2014)
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