Internal and External Capital Markets of Large Banks

By: Jonathan Wallen, Marco Macchiavelli and Lina Lu

Format:Print
| Language:English
| Pages:70

Abstract

We study the internal capital markets of large U.S. bank holding companies (BHCs). Within the BHC, commercial bank and broker-dealer divisions have different investment opportunities and actively share funding. We measure broker-dealer investment opportunities using arbitrage spreads and show that when spreads widen, the internal capital market transfers funding to the broker-dealer. However, the internal capital market is slow to respond to investment opportunities and the transfers are too small. These frictions cause liquidity to be partially segmented. As a result, division-specific liquidity prices the investment opportunities of that division.