Dissertation/Thesis Abstract

Essays in Bank Internal Capital Markets and Global Financial Stability
by Gupta, Arun, Ph.D., Yale University, 2019, 127; 13806558
Abstract (Summary)

The past few decades have seen an unprecedented trend of consolidation in banking. This has led to the formation of the modern global bank, a conglomerate with subsidiaries that span many countries and business lines (i.e. commercial banking, investment banking, asset management, etc). With the rise of global banks, the internal capital market has acquired a new importance. My dissertation studies financial stability from this perspective of internal capital markets, with very interesting results. Utilizing novel microdata, this manuscript consists of three chapters. The first examines how bank conglomerates choose to respond when regulators enhance the enforcement of capital requirements at weak subsidiaries (rather than the entire conglomerate). I find that parents refrain from raising equity in the external markets and instead activate internal capital market transfers in order to recapitalize their weak subsidiaries. Specifically, parents inject equity into weak subsidiaries using capital transferred away from strong siblings. This extraction leads parents to also shrink lending at the strong subsidiaries, what I deem the unanticipated "sibling spillover effect". This study has direct application to a macroprudential policy issue affecting global banks in the post-crisis era: the ring fencing of subsidiary-level capital along geographical borders. For example, US regulators have passed regulation that forces foreign banks to keep their US subsidiaries well-capitalized at all times by placing them under an intermediate US holding company. This effectively constitutes the enforcement of subsidiary-level capital requirements on US operations, and my results suggest this could have spillover effects to lending in operations back home (outside of the ring fence). The second chapter investigates how bank holding companies decided to spend the emergency TARP equity capital provided by the US government. Although this program was designed to recapitalize the banking system, I find that holding companies surprisingly chose not to use these funds to recapitalize their bank subsidiaries. Finally, the third chapter documents evidence for a hidden run on internal repo that took place between the US and European subsidiaries of global dealer banks during the crisis.

Indexing (document details)
Advisor: Gorton, Gary B.
Commitee: Metrick, Andrew, English, William B., Tookes, Heather E.
School: Yale University
Department: Management
School Location: United States -- Connecticut
Source: DAI-A 81/2(E), Dissertation Abstracts International
Subjects: Banking, Finance, Economics
Keywords: Bank capital, Financial intermediation, Financial stability, Global banking, Internal capital markets, Ring fencing
Publication Number: 13806558
ISBN: 9781085776493
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