Cross-border banking, intragroup exposures and risk-taking

Working paper 854
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Published: 24 February 2026

By: Eric Cuijpers Razvan Vlahu

Regulatory limits on intragroup exposures constrain capital allocation within multi-national banking groups. We develop a theoretical model of cross-border banking that captures internal capital markets under supranational supervision and borrowing constraints. Our analysis shows that relaxing intragroup exposure limits can amplify risk-taking by enabling parent banks to draw on affiliate resources and reallocate risk toward the home market, particularly when foreign affiliates are large, well capitalized, and subject to weaker liquidity requirements. We characterize the conditions under which this channel operates and discuss its implications for financial stability. Our findings inform the debate on multinational banking groups by showing how risks can emerge within these organizations and how regulatory tools can mitigate them.

Keywords: Multinational banks; Intragroup exposures; Risk-taking; Prudential reg-ulation; Liquidity requirements
JEL codes F23; G21; G28

Working paper no. 854

854 - Cross-border banking, intragroup exposures and risk-taking

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Research highlights 

  • We study risk-taking behavior in cross-border banking groups in light of a forthcoming regulatory shift in Europe, scheduled for implementation in 2028, which will significantly relax intragroup lending constraints across jurisdictions.
  • Our theoretical model characterizes the conditions under which looser intragroup exposure limits may generate risk-taking incentives within multinational banking groups under supranational supervision.
  • We show that, in the presence of borrowing constraints, relaxing intragroup exposure limits can increase parent-bank risk-taking, as funds are reallocated from foreign affiliates toward riskier home-country investments through internal capital markets, under the assumption that the parent bank’s investment opportunities are riskier than those of its affiliates.
  • These risk incentives are strongest for large, deposit-rich, and well-capitalized affiliates, indicating that higher capital expands internal funding capacity rather than constraining risk; this effect arises from exposure limits that scale with capital.
  • While liquidity requirements - by promoting safe-asset accumulation and enhancing the affiliate’s value in adverse states - can curb risk-taking, their effectiveness should be viewed largely as a theoretical - yet feasible - complementary mechanism rather than a sharply targeted policy lever.

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