Essay 1: This paper studies the implications of cross-country regulatory differences on banks’ transparency and stability abroad. Using a sample of multinational banks’ majority-owned foreign subsidiaries, this paper finds that foreign subsidiaries’ transparency decreases when their home countries have tighter activity restrictions than their host countries. The result is more pronounced when parent banks have lower capital ratios or when host countries have weaker supervisory power, suggesting that parent banks use opaque reporting practices to conceal their risk-shifting behavior. This paper further finds that less transparent foreign subsidiaries are more likely to fail or experience large deposit withdrawals during the 2007- 2009 financial crisis. To bolster the causal effec...[ Read more ]

Essay 1: This paper studies the implications of cross-country regulatory differences on banks’ transparency and stability abroad. Using a sample of multinational banks’ majority-owned foreign subsidiaries, this paper finds that foreign subsidiaries’ transparency decreases when their home countries have tighter activity restrictions than their host countries. The result is more pronounced when parent banks have lower capital ratios or when host countries have weaker supervisory power, suggesting that parent banks use opaque reporting practices to conceal their risk-shifting behavior. This paper further finds that less transparent foreign subsidiaries are more likely to fail or experience large deposit withdrawals during the 2007- 2009 financial crisis. To bolster the causal effect of regulatory differences on transparency, this paper uses difference-in-differences designs that take advantage of post-financial-crisis banking reforms and cross-border acquisitions. Overall, this paper contributes to the literature by documenting the impact of regulatory inconsistency on foreign subsidiaries’ transparency and the economic consequences of the diminished transparency.

Essay 2: The European Union adopted bail-in provisions that require creditors to absorb losses either through write-down or conversion of debt to equity when banks are close to insolvency. This paper finds negative shareholder reactions and positive creditor reactions to events associated with bail-in adoption. Further analysis shows that the positive creditor reactions are primarily driven by debt instruments that have higher priority ranking in the bail-in process. Exploiting the staggered transposition of the bail-in provisions into national law across member states, this paper finds that banks experience a decrease in risk-taking subsequent to bail-in implementation. Collectively, these findings suggest that bail-in provisions lead to risk-reduction and mitigate shareholder-creditor conflicts. Further analyses show that banks are more likely to serve as lead arrangers, require collateral, and shift loan portfolio concentration to borrowers with prior lending relationships and lower growth opportunities. Overall, this paper provides policy implications for the economic consequence of bail-in provisions and highlights the importance of capital structure in bank risk-taking and lending behavior.