International Shock Transmission : Does Bank Organizational Structure Matter?

The organization structure of global banks affects how they respond to liquidity shocks and matters for international shock transmission. Liquidity shocks to global banks induces a fire sales of securities by their international branches that rely on parent banks for funding, but not by their international subsidiaries that are independently capitalized and domestically funded. Domestic banks allocate funds to purchase securities sold in such fire sales, but in turn reduce credit supply, causing liquidity shocks to spill-over. Our study contributes to the debate regarding optimal regulation of global banks and externalities arising from securities trading by such banks