Do Foreign Bank Affiliates Cut Their Lending More than the Domestic Banks in a Financial Crisis?

Abstract

We contribute to the literature on the international transmission of balance sheet shocks that pummeled the banks of the industrialized countries in 2008 and 2009. We examine over time bank level data on 20,000 banks located around the world. Our identification strategy relies on the differential responses of foreign and domestic banks to the post-Lehman 2008 crisis. If in a particular market, say in Korea, a foreign-affiliated bank's (Citibank, Korea's) lending falls by more than a domestic bank's (Kookmin’s) lending, then we attribute this additional decline to the tightening of the foreign affiliates internal capital market at its headquarters. We control for the decline in market conditions common to all banks in a particular region by the decline in lending by the banks other than the foreign affiliated bank. We find evidence that internal capital markets do indeed affect cross-border lending. In particular, European bank affiliates in Latin America and Asia cut their lending by more than the domestic banks located in these regions. Our main original contribution is our focus on these regional effects.

Keywords: International Banking, Capital Flows

JEL Classification: G21, FOO