Risk and the Corporate Structure of Banks

Authors

  • GIOVANNI DELL'ARICCIA,

  • ROBERT MARQUEZ

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    • Dell'Ariccia is at the International Monetary Fund and the CEPR. Marquez is at Boston University. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF. We would like to thank Giacinta Cestone, Pierre Monin, Alberto Pozzolo, and seminar participants at Boston College, Boston University, Northwestern University Law School, the Federal Reserve Banks of San Francisco and St. Louis, as well as at the Conference on the Changing Geography of Banking (Ancona), the ECB_CFS Conference on Financial Integration and Stability in Europe (Madrid), and the XV Tor Vergata Conference (Rome) for useful comments. All errors are ours.


ABSTRACT

We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch-based structures are preferred to subsidiary-based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross-country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, a bank's corporate structure affects its risk taking and affiliate size.

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