Global banking and macroeconomic stability. Liquidity, control, and monitoring

Abstract

We study how the organizational structure of global banks shapes their impact on macroeconomic stability. We develop a two-country dynamic general equilibrium model in which global banks can either delegate loan monitoring to local affiliates or exert control over affiliates’ monitoring activities, hiring loan officers centrally. Moreover, we allow global banks to transfer liquidity between parents and local affiliates through internal capital markets. We show that global banks with a centralized business model (with loan officers hired centrally by the parent and an intense use of internal capital markets) help mitigate the impact of financial shocks on the host economy. However, they may become a destabilizing factor following real shocks that hit the quality of firms’ investments. The model predictions are consistent with bank-level evidence from a large set of countries that host global bank affiliates.