Updated: Aug 30, 2019
In recent decades, global have expanded internationally by establishing foreign subsidiaries and branches in many countries. Our paper shows that such increased cross-border linkages among global banks provides a channel for transmission of liquidity shocks across countries.
Increased cross-border connections among global banks can improve risk sharing if they allow global banks to easily reallocate capital via cross-border, internal capital markets on the basis of relative needs (Karolyi, Sedunov, and Taboada (2018)) or they can be harmful if they allow liquidity shocks to easily propagate across countries (Cetorelli and Goldberg (2012)).
In this paper, we examine if the organization structure of global banks affects how they respond to liquidity shocks and whether it plays a role in transmission of such shocks across countries. The answer to these questions has important implications for future regulation of global banks.