Global banks and internal capital markets: Evidence from bank-level panel data in emerging economies

•The paper addresses the operation of internal capital markets in multinational banks.•Internal capital markets alleviate bank subsidiaries’ lending growth-to-internal funds sensitivity.•The effect of internal capital markets is more pronounced in higher capitalized and smaller subsidiaries.•The effect of internal capital markets is dampened with host expansionary monetary policy.

In this paper, we examine the operation of internal capital markets within multinational financial conglomerates. We observe the lending behavior of foreign subsidiaries of the major multinational banks which conduct banking activities in emerging and developing countries. Using loan growth-to-internally generated funds sensitivity as a measure of subsidiary's financing constraints, we explore whether such sensitivity is correlated with the availability of internally generated funds at the consolidated banking organizational level, and find robust evidence for the operation of internal capital markets. We also provide evidence that internal capital markets of multinational banks alleviate financial constraints faced by their foreign subsidiaries.