Relaxing intragroup limits amplifies risk-taking in multinational banks
A new working paper from De Nederlandsche Bank (DNB) finds that relaxing regulatory limits on intragroup exposures can amplify risk-taking by multinational banking groups. This occurs as parent banks reallocate risk toward the home market by drawing on affiliate resources.
Parent banks draw on affiliate strength
A theoretical model developed by De Nederlandsche Bank researchers explores how regulatory limits on intragroup exposures shape risk-taking within multinational banking groups.
The analysis shows that easing these limits can amplify risk-taking, particularly by enabling parent banks to draw on resources from their foreign affiliates.
This mechanism allows for the reallocation of risk toward the home market, especially when foreign affiliates are large, well capitalized, and subject to less stringent liquidity requirements.
The paper highlights that national authorities currently retain discretion to impose stricter caps on intragroup credit flows, but this ability will lapse in 2028 under the European capital framework, leading to an exogenous policy shift that motivates the study's central question.
Beyond capital buffers: A holistic view
The study's findings carry several policy implications, suggesting that supervisors must remain vigilant to heightened risk-taking once transitional arrangements for intragroup limits expire in 2028. The analysis indicates that size-based regulatory differentiation may be warranted, with stricter rules for larger affiliates to mitigate risk.
Crucially, higher affiliate capitalization was found to exacerbate, rather than dampen, risk transmission through intragroup funding.
This challenges the conventional reliance on capital buffers as a standalone safeguard and underscores the need for a more holistic supervisory approach that accounts for intragroup dynamics and cross-border risk channels.
Liquidity requirements are identified as a feasible complementary mechanism to curb risk-taking.