Effects from the Parent Exposure to Subsidiaries inside Bank Holding Companies (BHCs)

This paper investigates whether the degree of exposure of the parent to the subsidiaries is an important determinant for the corporate structure and the related financial stability of Bank Holding Companies (BHCs). We observe that, when the parent is more exposed to the subsidiaries, through the holdings of equity or debt claims issued by the same affiliates, the ultimate BHC capital structure is highly leveraged, and tends to include a larger share of nonperforming assets. Our view is that, parent–subsidiary exposures might create frictions, which leads to deterioration in the financial stability of BHCs. The paper discusses the results in the framework of the debate among financial authorities around the complexity of financial organizations.