Internal and External Capital Markets of Large Banks

By: Lina Lu, Marco Macchiavelli and Jonathan Wallen

Format:Print
| Language:English
| Pages:66

Abstract

Despite regulatory restrictions, large U.S. bank holding companies have sizable and dynamic internal capital markets. They raise long-term debt at the holding company and deposits at the commercial bank to internally make unsecured loans to affiliated broker-dealers. This internal borrowing is not at the same arms length as external borrowing. Internal capital markets respond more and faster to broker-dealer investment opportunities than external ones. Despite this, the internal capital market is not perfect. At horizons of less than a quarter, internal capital is slow moving. This friction causes partial segmentation of liquidity within the bank holding company.