#08-15
Risk and the Corporate Structure of Banks
Giovanni Dell' Ariccia and Robert Marquez, March 2008
Abstract:Banks organize their foreign affiliates as separately incorporated subsidiaries, or as
branches whose liabilities represent claims on the parent institution. Different risks
influence this decision. Subsidiary-based corporate structures benefit from the greater
protection against economic (credit) risk provided by affiliate-level limited liability, but
are more exposed to the risk of capital expropriation, against which branch structures
are protected. Moreover, branch structures benefit fromamore efficient internal market
for bank capital. Greater cross-country risk correlation and more accurate pricing of
risk by investors reduce the differences between the two structures. Finally, the bank’s
corporate structure affects risk taking and affiliate size.
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