Powerful Parents? The Local Impact of Banks’ Global Business Models

We collect information about multinational banks’ internal capital markets from interviews with over 400 bank CEOs across emerging Europe. Using these unique data, we document substantial variation in how banks financially manage foreign subsidiaries and then assess how this variation affected local credit growth during the Great Recession. We show that subsidiaries grew faster if the parent bank set explicit growth targets; supported these targets with relatively cheap funding; and was less involved in local risk management. We then combine our data with firm-level information about credit constraints during the crisis. In line with our bank-level evidence, we find that in localities where foreign banks received cheap parent funding, firms were less credit constrained. These results point to the importance of banks’ business models—over and above funding structure—as a determinant of crisis transmission in integrated banking markets. JEL codes: F36, F65, G21, G32