Internal Capital Markets and Bank Holding Company Efficiency

Bank holding companies and in particular its internal capital markets have been widely discussed in recent fnancial literature. Especially, the fnancial crisis brought the question for regulatory intervention in the fnancial markets anew. Empirical evidence suggests that bank holding companies have clear preferences for double leverage, which is not based on an unambiguous and explicit economic foundation. In this article, we analyze the effects of equity, debt and double leverage on the effciency of bank holding companies. We show that BHC effciency is negatively affected by equity fnancing from parent to subsidiaries and this effect is even more pronounced in case of double leveraging. Our findings indicate that further steps from regulators are necessary in order to prevent ineffcient fnancing via double leverage, which may be used to circumvent regulatory capital requirements.