Internal Capital Markets and Macroprudential Policy Lessons from the 2007–2009 Crisis

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Authors: Nilufer Ozdemir
Cited by: 1
References: 35

Abstract

Financial regulation assumes that parent firms reliably support distressed subsidiaries during crises. We test this assumption with evidence from the 2007–2009 financial crisis and find that parent support was selective rather than reliable. Using novel measures of sibling distress and granular parent-affiliate funding flows, our findings reveal that capital allocation within bank holding companies (BHCs) disproportionately favored stronger affiliates. The results show that BHCs channeled capital toward more liquid and resilient subsidiaries while limiting support to weaker ones. Profitable parents became increasingly selective under stress, and nonbank subsidiaries emerged as critical internal liquidity providers when external markets froze. This selective reallocation highlights a gap between regulatory doctrine and actual behavior: intra-group capital allocation mechanisms can amplify systemic stress rather than mitigate it. By examining overlooked internal market dynamics during this major financial crisis, the study offers insights for strengthening financial stability against future systemic shocks. Assessing parent firm strength alone appears insufficient. Effective crisis prevention requires supervisory frameworks that monitor sibling fragility across conglomerates, evaluate the liquidity roles of nonbank affiliates, and stress test intra-group capital flows.

Fields of Study & Subjects

Banking stability regulation efficiency Corporate Finance and Governance Corporate Insolvency and Governance

Publication details

Journal / source
Journal of risk and financial management
Publisher
MDPI AG
Volume
19
Issue
2
Pages
116–116
Publication date
4 February 2026
Language
EN