Do bank internal capital markets promote lending?

We analyze the relation between organization structure and bank lending. Loan growth among banks that are affiliated with a multi-bank holding company is shown to be less sensitive to the bank's cash flow, capital position and liquidity relative to unaffiliated banks. Our results, coupled with the recent findings of Houston et al. (Houston, J.F., James, C., Marcus, D., Journal of Financial Economics 46 (1997) 135-164.), suggest that bank holding companies establish internal capital markets in an attempt to allocate capital among their various subsidiaries. We also find that affiliated banks are more responsive to local market conditions than their unaffiliated counterparts. This finding suggests that despite the concerns raised regarding bank consolidation - affiliated banks are willing to lend in local markets as long as the opportunities are there. (C) 1998 Elsevier Science B.V. All rights reserved.