Banking organizations with large networks of equity relationships have evolved in many countries of the EU. Understanding the benefits of financial conglomeration and its impact on policy constitute an important public welfare issue. The purpose of this thesis is to investigate whether credit institutions in the EU face
capital market frictions and whether the affiliation with other financial institutions can help the banks to mitigate the negative impact of capital market frictions on bank lending activities. Using an investment model from the corporate finance literature with costly external finance, the study derives an empirical regression
counterpart for the banking firm to test the existence of internal capital markets for credit institutions.
Moreover, the thesis examines the impact of internal capital markets on the bank lending channel of monetary policy transmission mechanism. Finally, the thesis examines the impact of internal capital markets on capital risk relationships in banking and on the influence of capital regulation on bank's adjustments in capital and risk levels.

Overall, the thesis provides evidence that EU credit institutions face capital market frictions and that their
affiliations with other financial institutions can lessen the impact of market inefficiencies on bank investment activities. Moreover, the results show that internal capital markets created through affiliation with other
financial institutions can insulate bank lending from monetary shocks. Finally, the study finds that internal capital markets can make banks less responsive to capital adequacy regulation.

The key implications of this thesis for policy-makers relate to merger and acquisition regulation, the conduct of monetary policy and capital adequacy regulation. First, public regulators have to consider the affiliation factor in the response of credit institutions' lending activities to negative economic shocks. There is also need to consider the impact of consolidation and integration on the availability of bank lending. Third, monetary policy-makers have to consider the fact that institutional characteristics of depositary institutions can change
the traditional lending channel of monetary policy transmission. Finally, capital adequacy regulators also need to recognize the need for adjustment of capital requirements for the complex institutional arrangement
between regulatory and non-regulatory financial institutions.