Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy


  • Murillo Campello

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    • Department of Finance, University of Illinois at Urbana-Champaign. This paper is a revised version of Chapter II of my doctoral dissertation at the University of Illinois. I thank the members of my dissertation committee: Charlie Calomiris, Charlie Kahn, George Pennacchi, and Mike Weisbach. I also thank seminar participants at Arizona State University, College of William and Mary, MIT, University of Arizona, University of Illinois, and University of Maryland, for their comments. I am indebted to Rick Green (the editor), Charlie Hadlock, and an anonymous referee for their valuable suggestions. All remaining errors are mine.


This paper looks at internal capital markets in financial conglomerates by comparing the responses of small subsidiary and independent banks to monetary policy. I find that internal capital markets in financial conglomerates relax the credit constraints faced by smaller bank affiliates. Further analysis indicates that those markets lessen the impact of Fed policies on bank lending activity. The paper also examines the role of internal capital markets in influencing the investment allocation process of those conglomerates. My findings suggest that frictions between conglomerate headquarters and external capital markets are at the root of investment inefficiencies generated by internal capital markets.