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| We investigate how solvency and wholesale funding shocks to 84 OECD parent banks affect the lending of 375 foreign subsidiaries. We find that parent solvency shocks are more important than wholesale funding shocks for subsidiary lending. Furthermore we find that parent undercapitalisation does not affect the transmission of shocks while wholesale shocks transmit to foreign subsidiaries of parents that rely primarily on wholesale funding. We also find that transmission is affected by the strategic role of the subsidiary for the parent and follows a locational rather than an organisational pecking order. Surprisingly liquidity regulation exacerbates the transmission of adverse wholesale shocks. We further document that parent banks tend to use their own capital and liquidity buffers first before transmitting. Finally we show that solvency shocks have higher impact on large subsidiary banks with low growth opportunities in mature markets. |
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