The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

Abstract

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank-to-bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign-owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.

Keywords: Bank Liquidity Shocks, Credit Supply Shocks, Foreign-owned Banks, Bank Lending Channel, Emerging Markets, Financial Contagion

JEL Classification: G21, F34, O19