Cross-Border Banking, Intragroup Exposures, and Risk-Taking
Research Highlights
- A forthcoming regulatory shift in Europe, scheduled for 2028, will significantly relax intragroup lending constraints across jurisdictions.
- In the presence of borrowing constraints, relaxing intragroup exposure limits can increase parent-bank risk-taking, as funds are reallocated from foreign affiliates toward riskier home-country investments through internal capital markets.
- These risk incentives are strongest for large, deposit-rich, and well-capitalised affiliates — higher capital expands internal funding capacity rather than constraining risk, because exposure limits scale with capital.
- Liquidity requirements can curb risk-taking by promoting safe-asset accumulation, but their effectiveness is best understood as a complementary mechanism rather than a sharply targeted policy lever.
Abstract
Regulatory limits on intragroup exposures constrain capital allocation within multinational banking groups. We develop a theoretical model of cross-border banking that captures internal capital markets under supranational supervision and borrowing constraints. Our analysis shows that relaxing intragroup exposure limits can amplify risk-taking by enabling parent banks to draw on affiliate resources and reallocate risk toward the home market, particularly when foreign affiliates are large, well capitalised, and subject to weaker liquidity requirements. We characterise the conditions under which this channel operates and discuss its implications for financial stability. Our findings inform the debate on multinational banking groups by showing how risks can emerge within these organisations and how regulatory tools can mitigate them.
Keywords: Multinational Banks · Intragroup Exposures · Risk-Taking · Prudential Regulation · Liquidity Requirements
JEL codes: F23, G21, G28