Discussion Paper Details

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Title: Nonconsolidated subsidiaries, bank capitalization and risk taking

Author(s): Di Gong, Harry Huizinga and Luc Laeven

Publication Date: December 2015

Keyword(s): bank leverage, capital regulation, organizational structure, risk taking and undercapitalization

Programme Area(s): Macroeconomics and Growth

Abstract: Bank holding companies may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches -- consolidating the minority-owned subsidiaries into the parent or deducting equity investments in minority ownership from the parent?s capital -- we find that the effective capital ratios of US bank holding companies are substantially lower than the reported ratios. Empirical evidence suggests that the undercapitalization is associated with higher risk taking at the bank holding company level. These findings indicate that incomplete consolidation of minority-owned financial institutions constitutes a loophole in capital regulation.

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Bibliographic Reference

Gong, D, Huizinga, H and Laeven, L. 2015. 'Nonconsolidated subsidiaries, bank capitalization and risk taking'. London, Centre for Economic Policy Research.