Financial Synergies and the Organization of Bank Affiliates: A Theoretical Perspective on Risk and Efficiency

ICER Working Paper No. 6/2013

51 Pages Posted: 15 May 2013 Last revised: 20 Jan 2015

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Clas Wihlborg

Chapman University; University West

Date Written: December 10, 2014

Abstract

We analyze theoretically how financial synergies among bank affiliates affect banks' choice of organizational structure in branches or subsidiaries characterized by different arrangements for internal insurance against affiliates’ default. Financial synergies may be generated by reduced default costs, exploitation of government bailouts and financial economies of scale. Private and social values are compared with endogenous costs of debt and leverage, and with constrained leverage. The analysis has implications for current proposals to “ring-fence” bank-affiliates in different countries and affiliates within conglomerates. The impact of ring-fencing, that limits internal insurance arrangements, on social valuation depends on whether leverage constraints are binding.

Keywords: bank organization, bank risk, financial synergies, endogenous leverage in banking, default costs, bailouts

JEL Classification: G210, G32, G33

Suggested Citation

Luciano, Elisa and Wihlborg, Clas, Financial Synergies and the Organization of Bank Affiliates: A Theoretical Perspective on Risk and Efficiency (December 10, 2014). ICER Working Paper No. 6/2013, Available at SSRN: https://ssrn.com/abstract=2264713 or http://dx.doi.org/10.2139/ssrn.2264713

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Clas Wihlborg (Contact Author)

Chapman University ( email )

333 N. Glassell
Orange, CA 92866
United States
+17147447630 (Phone)

University West ( email )

Trollhättan, 46186
Sweden

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