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
Date Written: December 10, 2014
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: Suggested Citation