Multinational banks (MNBs) play a critical role in promoting international business and maintaining the stability of the global financial system. Offering policy implications for regulators worldwide, Tai-Yuan Chen and Mingyi Hung of HKUST, working with a colleague, show how the reporting transparency of MNBs (which operate extensively across borders) is affected by bank regulations (which are predominantly national and vary widely between countries).
The researchers focus on regulatory restrictions on banks’ securities, insurance, and real estate activities, because these are tightly linked to bank risk-taking. “Our emphasis on banks’ financial reporting transparency stems from its importance in facilitating outside monitoring and discipline,” they explain, “which in turn mitigate banks’ vulnerability to downside risk and enhance financial stability.”
Their empirical analysis yields novel insights. “We find that bank transparency declines when
home countries have tighter activity restrictions,” they report. This decline is particularly pronounced for foreign subsidiaries controlled by parent banks with low capital ratios or situated in countries with weak regulatory oversight—suggesting that in such cases, parent banks use opaque reporting to conceal risk-taking abroad.
The researchers also tested the implications of MNBs’ transparency for bank failure during the 2007–2009 financial crisis, and their results suggest that more opaque subsidiaries are more likely to fail during financial crises. “Our results are consistent with the view that the opacity of MNBs’ reporting, which stems from debt-equity agency conflicts with weak regulation, exacerbates bank failures abroad,” they explain.
As multinationals become increasingly dominant global players, this research offers policy guidance for regulators worldwide by highlighting the importance of disclosure practices among MNBs’ foreign subsidiaries. This in turn may have implications for the stability of multinational banking operations and the broader financial system.