Journal of Credit Risk

Agency problems in multinational banks: does parent complexity affect the risk-taking of subsidiaries?

Krzysztof Gajewski and Łukasz Kurowski

  • The goal of this paper is to verify the relationship between parent geographical complexity and risk-taking by subsidiaries.
  • Parent-group complexity can increase risk-taking at the subsidiary level, which is in line with predictions formulated on the basis of the agency problem theory.
  • The size (either of a subsidiary or parent bank) is a significant factor affecting the link between complexity and risk within multinational banking groups.
  • The study provides a new perspective on prudential policy in a small open economy where the international aspect of financial institutions must be considered during supervisory actions.

In recent decades, banks have become increasingly global, which is reflected inter alia in the presence of foreign-owned banks in many countries. A vast amount of literature documents that parent company situations can significantly affect the operations of subsidiaries. Our paper empirically reviews the relationship between the geographical complexity of parent-groups and the risk-taking behavior of subsidiaries using a panel of data for Polish domestically owned and foreign-owned banks covering the years 2008–17. This relationship can be driven by agency problems, as complex banks operating in multiple regions may not be able to efficiently control their subsidiaries. This may create incentives for local managers to take more risks. We find that parent complexity affects risk-taking at the subsidiary level. However, the relationship depends on which proxy measure is used to assess risk-taking. Our results suggest that there is a case for proactive and prudent policies for subsidiaries of complex parent banks.

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