Internal capital markets and corporate politics in a banking group

This study looks inside a large retail-banking group to understand how influence within the group affects internal capital allocations and lending behavior at the member bank level. The group consists of 181member banks that jointly own a headquarters. Influence is measured by the divergence from one-share-one-vote. We find that more influential member banks are allocated more capital from headquarters. They are less likely to decrease lending after negative deposit growth
or to increase lending following positive deposit growth. These effects are stronger in situations in which information asymmetry between banks and the headquarters seems greater. The evidence suggests that influence can be useful in overcoming information asymmetry.