Social centralisation, bank integration and the transmission of lending shocks / Reint E. Gropp, Deyan Radev

Abstract

We introduce an innovative approach to measure bank integration, based on the corporate culture of multinational banking conglomerates. The new measure, the Power Index, assesses the prevalence of a language of power and authority in the financial reports of global banks. We employ a two-step approach: As a first step, we investigate whether parent-bank or parent-country characteristics are more important for bank integration. In a second step, we analyse whether bank integration affects the transmission of shocks across borders. We find that the level of integration of global banks is determined by parent-bank-specific factors as well as by the social centralisation in the parent’s country: Ethnically diverse and linguistically homogenous countries nurture decentralised corporate structures. Political and economic factors, such as corruption, political rights and economic development also affect bank integration. Furthermore, we find that organisational integration affects the transmission of exogenous shocks from parent banks to their subsidiaries: The more centralised a global bank is, the lower the lending of its subsidiaries after a solvency shock. Wholesale shocks do not appear to be transmitted through this channel. Also, past experience with solvency shocks reduces the integration between parents and subsidiaries.