The expansion of global banking has represented one the major development in the macro financial landscape in recent decades. The way global banks have penetrated host countries has progressively shifted from a more cross border lending model to a more direct local presence of global banks. A growing literature in macro banking has been increased exploring the macroeconomic implications of global banks. Most of this literature, however, appears to neglect the articulated decision process that characterized complex financial institutions, such as global banks. This gap in our understanding is particularly relevant if we consider the increased local presence of multinational banks branches and subsidiaries in host countries. Global banks routinely make complex decision regarding the allocation of monitoring resources and liquidity funds across their global conglomerate. These decisions also have implications for the allocation and control between global banks headquarters and local affiliates. Studying the allocation of monitoring liquidity and control on the one side and multinational banks lending decisions on the other side is thus critical for understanding the role of multinational banks in macroeconomic stability.
This research project aims to understand how multinational banks can affect the transmission of domestic and international shocks, with a special focus on how the organization structure and business models of multinational banks can shape this influence. To this end, the project conducts both an empirical and a theoretical analysis. We first investigate how the organizational structure of global banks affect the response of their lending, deposit taking and liquidity allocation to aggregate shocks and draw inferences on the patterns of the response of global banks. We next develop a dynamic business cycle model where multinational banks coexist with local banks in the credit market.
This research aims to understand how the decision making process of global banks, inluding their liquidity allocation and monitoring decisions across their global conglomerates, can shape macroeconomic stability. This is relatively an unexplored aspect and yet one of key importance for understanding the consequences of bank globalization on aggregate stability. In fact, to the best of our knowledge, we are the first to embed in a quantitative macro model the due diligence performed by banks on their loan portfolio and studying how due diligence incentives interact with liquidity provision obtained by the affiliate banks through the internal capital market of the global bank.
A further novelty is that this framework permits us to analyze how the global banks decision process affect the business cycle transmission and what credit policies should be designed by the central bank and regulatory authorities to restore macroeconomic and financial stability.
An additional innovation of our research is that we are the first to analyze, from an empirical point of view, what are the decisions of global banks in terms of liquidity allocation and monitoring decisions and whether the observed pattern are consistent with those arising from the theoretical model. To this end we will make use of an exclusive dataset where we hand-match loan-level with bank-level granular data collected from the European Bank for Reconstruction and Development survey.