The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Deniz Anginer, Eugenio Cerutti, and Maria Martinez Peria
INTERNATIONAL MONETARY FUND
This paper examines the association between the default risk of foreign bank subsidiaries in developing
countries and their parents during the global financial crisis, with the purpose of determining the size and
sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from
their parents. We find evidence of a significant and robust positive correlation between parent banks' and
foreign subsidiaries' default risk. This correlation is lower for subsidiaries that have a higher share of
retail deposit funding and that are more independently managed from their parents. Host country bank
regulations also influence the extent to which shocks to the parents affect the subsidiaries' default risk. In
particular, the correlation between the default risk of subsidiaries and their parents is lower for
subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure
requirements, and tougher restrictions on bank activities.