nr 088 - Monitoring Costs and Multinational-Bank Lending

DNB Working Papers
Date 6 February 2006

We use a two-country model to examine how endogenous changes in monitoring intensity and exogenous changes in monitoring efficiency affect multinational-bank lending. First, an endogenous decline in monitoring intensity limits the amount of deposits that banks can attract. This lowers bank lending. Shocks that reduce bank capital relative to firm capital therefore have a stronger negative effect on bank lending compared to a model with exogenous monitoring intensity. Second, international differences in monitoring efficiency create a lending bias towards the country where monitoring is performed most efficiently. Multinational-bank subsidiaries that monitor efficiently attract more deposits and lend more than less efficient subsidiaries. JEL codes: F15, F23, F36, G21. Key words: multinational banks, monitoring, credit supply.