Part II Economic Regulation, 10 Regulating Multinational Banks

This chapter explores multinational banks (MNBs). Between 2007 and 2009, the global economy experienced the global financial crisis, one of the most significant economic shocks in history, bringing into sharp relief the role of MNBs in its creation. While the MNB, as one type of multinational enterprise (MNE), is subject to the other rules and regulations discussed in this book, several important properties and characteristics show the additional rules and regulations applicable only to MNBs. In addition, the contribution of MNBs to the financial crisis raised doubts concerning the efficacy of existing regulatory rules, and the shortcomings of MNB corporate governance, leading to a reappraisal of both. The chapter tells the story of the crisis, including the role of the MNBs, outlines the regulatory regime as it stood before the crisis, and how the crisis has subsequently impacted on regulatory changes and MNB corporate governance. It concludes with an appraisal of the social and political effects of the crisis and of the future evolution of MNB regulation.

Multinational banks and the formation of debt-type economy in the countries of Central and Eastern Europe

Research background: Given the fact that multinational banks’ credit activity leads to the accumulation of external debt in the borrowing countries, which potentially contributes to the formation of a debt-type economy, more in-depth research of the scope and consequences of such impact on the example of specific recipients is required. Purpose of the article: The purpose of the article is to develop theoretical and methodological bases of the study of multinational banks’ lending activity in terms of debt-type economy on the example of the countries of Central and Eastern Europe. Methods: A system of general scientific and special research methods, namely, statistical (correlation analysis, in particular), structural-functional and comparative analysis, has been applied to achieve the above-mentioned purpose. Findings & Value added: The results of the study indicate that multinational banks’ direct cross-border lending remains an important source of external debt accumulation and the formation of a debt-type economy in the countries of Central and Eastern Europe. Based on the assessment of the external debt indicators of the countries under the study, it has been determined that they all can be classified as debt-type economies. At the same time, the countries of the group still remain significantly differentiated in terms of relative indicators of direct cross-border lending and external debt. It has been concluded that multinational banks’ aggressive lending strategy during the growth phase in the countries of Central and Eastern Europe has exacerbated the problem of external indebtedness during the recession phase.

Directions of improvement of multinational banks’ credit activity regulations in terms of debt-type economy

Research background: Amidst deepening economic internationalization and financial globalization, multinational banks remain the most important financial intermediaries in the international debt capital market. By ensuring the cross-border movement and redistribution of credit resources, multinational banks’ credit activities lead to the accumulation of external indebtedness in the host countries. Purpose of the article: The purpose of the article is to substantiate scientific and practical recommendations for improving multinational banks’ credit activities regulations in order to minimize their negative impact on the level of external indebtedness and the formation of the debt-type economy in the host countries. Methods: Methods of abstraction, systematization and generalization, as well as system approach have been used in our research. Findings & Value added: A hierarchical system of multinational banks’ credit activity regulation, which includes institutional-subjective (the level of multinational banks themselves), macro-regional (the level of the home country and host countries), mega- and meta-regional, and global levels have been proposed. Scientific and practical approaches to regulating multinational banks’ credit activities, which are based on the introduction of special regulatory measures by the countries with debt-type economies (transformation of external financing sources, revision of forms of credit cooperation with multinational banks, intensification of inclusion in the processes of securitization of credit relations, introduction of a system of macroprudential regulation instruments, increasing the level of international liquidity), have been developed.

Avoiding taxes: banks’ use of internal debt

This paper investigates how multinational banks use internal debt to shift profits to low-taxed affiliates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-financial multinationals do. We find that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through financial flows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting.