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Multinational Finance

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896N1 - Multinational Financial Management
The impact of the global financial crisis on the Multinational bank funding and its liquidity

CandNo: 109098
Tutor: Dr Bruce Hearn, Dr Javad Izadi Zadeh Darjezi and Miss Madina Tash
Date of Submission: 7th March 2013

Abstract
This paper analyses the impact of the global financial crisis on the Multinational bank funding and its liquidity. In analysis of several articles, under the global financial crisis, multinational banks change their funding model to the stable wholesale funding and reduce the lending when the parent banks are financially weak. For its liquidity, multinational bank subsidiaries can rely on support from the bank group they belong to and therefore tend to hold a slightly lower liquidity.

Content Abstract 1 Introduction 3 Literature Review 3 Analysis 5 Conclusion 6 Reference 6 Appendix 7

Introduction
As the financial crisis existed through the fabric of the world’s financial system in the third quarter of 2007, it became clear that firm access to finance was going to be an early victim, including Multinational banks. During the local crisis, strong parent banks used their internal capital market to provide subsidiaries with capital and liquidity (Haas and Lelyveld, 2010). Domestic banks rely to a great extent on local funding, whereas an affiliate of a multinational bank can exploit both local funding possibilities and the funding capacity of its parent bank, all of which are embedded in the fund management of the banking conglomerate. And as such I am interested to study the impact of the global financial crisis on the funding of multinational banks and its liquidity, compared with stand-alone domestic banks. In the first part, the paper will present the several literatures behind the multinationals bank financing during the great recession, and I analyse these findings before the conclusion.
Literature Review
During the 2008-09 global financial crises, multinational bank subsidiaries of groups relied to a greater extent on wholesale funding. The paper “Funding patterns and liquidity management of internationally active banks” by the Committee on the Global Financial System (CGFS) (2010) identifies an increased reliance on retail funding and more expensive wholesale funding as significant changes in multinational banks’ funding models. Haas and Lelyveld (2010) also underlined the changes and pointed out the evidence for the existence of internal capital markets in which subsidiaries with financially strong parent banks were able to expand their lending faster and reduced credit less under financial distress. Düwel and Frey (2012) found short-term wholesale funding of its local banks subsidiaries as a destabilizing element in the crisis. As a result, interbank loans are the most relevant funding source.
Moreover, there are a number of papers focusing on the lending by multinational bank subsidiaries under financial crisis. Peek and Rosengren (2000) demonstrated that Japanese bank branches in the US reduced their credit supply after their parent banks were hit by a sharp drop in stock prices in 1990 in combination with stricter capital requirements. Popov and Udell (2010) showed that multinational bank lending declined in particular when parent banks got weak finance. Another paper by Schnabl (2011) got similar results that the Russian crisis in 1998 spilled over to Peru, which affected a decline of foreign funding and local lending by its multinational bank subsidiaries. Following these papers, Chava and Purnanandam (2011) also found similar results for US banks.
For liquidity, wakened parent banks, hit by a reduction in inter-bank liquidity and other funding, may even have repatriate funds from subsidiaries to headquarters by using their internal capital market (Morgan, et al., 2004). According to the papers by Haas and Lelyveld (2010), it showed two examples that due to the Lehman Brother collapse in the end of 2008, the multinational subsidiaries in Russia and the Czech Republic used local liquidity to support their foreign headquarters in Italy and France. Also, the situation occurred again in the mid of 2011, which was caused by Euro crisis.
As the sharp increase in multinational banks’ reliance on wholesale funding, Tirole (2011) was motivated to focus on the liquidity and proposed modeling approaches to analyse multinational banks’ demand for liquidity, determinants of aggregate liquidity and market liquidity breakdowns. In addition, the paper by Navaretti, et al. (2010) briefly described the functioning of internal capital markets and summarized the literatures in finance and economics that have analysed their working, both theoretically and empirically.
Analysis
* Importantly, the findings showed a significant impact of the use of wholesale funding by parent banks on the lending growth of their subsidiaries. Despite of the global financial crisis, there is a trend that parent banks heavily rely on wholesale funding as their alternative source of finance. In this case, the bank subsidiaries tend to grow faster. Thus, parent banks can easily raise money on the wholesale markets, which can distribute the funding to their subsidiaries located abroad via their internal capital market. * As many findings mentioned above focused on the lending with the interaction between multinational subsidiaries in abroad and its parent banks, it is not difficult to find that lending by bank subsidiaries located abroad depends not only on the stability and resources of the subsidiaries itself, but also on characteristics of the parent bank. * Different of multinational banks located in different countries may well face variety costs of external funds. These multinational banks may thus collect deposits; for example of deposit in country 1 and 2, and finance a project in country 2 by pooling deposits in an internal capital markets. Moreover, by pooling liquidity from branches in different countries, when multinationals’ liquidity shocks are not positively correlated, an affiliate may then be able to keep lower liquidity to take care of the duration mismatch of assets and liabilities typical of the transformation activity of financing. As the data shown in Appendix 3 (Haas and Lelyveld, 2010), the median liquidity and solvency of stand-alone domestic banks was slightly higher than that of multinational bank subsidiaries. Therefore, the bank group may support multinational bank subsidiaries and thus tend to rely on a slightly lower liquiditu and solvency buffer.
Conclusion
With the unexpected bankruptcy of Lehman Brothers in September 2008, the funding of banks became more difficult due to the loss of confidence both on the internal capital market and the interbank market. Multinational banks rely on their own capacity to build liquidity buffers and raise stable funding, thereby reducing the costs of external funds and the funding liquidity risk during the period of global financial crisis. In other words, Multinational banks with long-term refinancing on the wholesale market and reducing their credit rely on a stable funding source during the crisis. The financial crisis has alerted banks and supervisors to the importance of robust liquidity management frameworks and close monitoring of the liquidity situation, related to the currency and maturity mismatches, which should contribute to stability.

Reference
CGFS (2010) Funding Patterns and Liquidity Management of Internationally Active Banks. Committee on the Global Financial System Papers, No 39.
Chava, S. and Purnanandam, A. (2011) The Effect of Banking Crisis on Bank-Dependent Borrowers. Journal of Financial Economics, 99(1), pp. 116–135.
Düwel, C. and Frey, R. (2012) Competition for Internal Funds within Multinational Banks: Foreign Affiliate Lending in the Crisis. Frankfurt: Dt. Bundesbank.
Haas, R.D. and Lelyveld, I.V. (2010) Internal Capital Markets and Lending by Multinational Bank Subsidiaries, Journal of Financial Intermediation, 19(1), pp.1–25.
Morgan, D., Rime, B. and Strahan, P. (2004), Bank Integration and State Business Cycles. Quarterly Journal of Economics, 119 (4), pp. 1555–1585.
Navaretti, G.B., et al. (2010) Multinational banking in Europe – financial stability and regulatory implications: lessons from the financial crisis. Multinational Banks, 25(64), pp. 705-753
Peek, J. and Rosengren, E.S. (2000) Collateral Damage: Effects of the Japanese Bank Crisis on the United States. American Economic Review, 90(1), pp. 30–45.
Popov, A. and Udell, G. (2010) Cross-Border Banking and the International Transmission of Financial Distress during the Financial Crisis of 2007-2008. ECB Working Paper 1203, Frankfurt: European Central Bank.
Schnabl, P. (2011) Financial Globalization and the Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market. Journal of Finance, forthcoming.
Tirole, J. (2011) Illiquidity and All Its Friends. Journal of Economic Literature, 49(2), pp. 287-325.

Appendix
Appendix 1
Internal versus external capital markets in investments to Eastern Europe

Appendix 2

Appendix 3

Appendix 4…...

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