Nonbank Subsidiaries and the Hidden Fragility of Internal Capital Markets Reallocation

<jats:p>Banks became safer after Basel III. Whether it made the broader organization safer is less clear. We document that bank subsidiaries accumulated capital, improved asset quality, and reduced risk. But holding companies built that capital largely by drawing on their nonbank affiliates. Did the reallocation reduce risk for the organization as a whole or merely move it to a less visible part of the firm? Our evidence points to the latter: the same internal capital markets that helped banks meet tighter requirements left nonbank affiliates with thinner buffers and riskier business models, and a greater capacity to transmit distress back to the organizations that own them.</jats:p>