Cross-Border Lending Contagion in Multinational Banks

40 Pages Posted: 19 Sep 2007

See all articles by Alexis Derviz

Alexis Derviz

Czech National Bank (CNB) - Monetary Department

Jirí Podpiera

Czech National Bank

Date Written: September 2007

Abstract

We study both theoretically and empirically the interdependence of lending decisions in different country branches of a multinational bank. First, we model a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. A separate channel of shock propagation exists since lending decisions are influenced by delegation and precautionary motives. This can entail "contagion", i.e. parallel reactions of the loan volumes in both countries to the parent bank home country disturbance. Second, we look for the presence of lending contagion by panel regression methods in a large sample of multinational banks and their affiliates. We find that the majority of multinational banks behave in line with contagion effect. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries.

Keywords: Multinational bank, diversification, delegation, lending contagion, panel regression

JEL Classification: F37, G21, G28, G31

Suggested Citation

Derviz, Alexis and Podpiera, Jirí, Cross-Border Lending Contagion in Multinational Banks (September 2007). ECB Working Paper No. 807, Available at SSRN: https://ssrn.com/abstract=1008468 or http://dx.doi.org/10.2139/ssrn.1008468

Alexis Derviz (Contact Author)

Czech National Bank (CNB) - Monetary Department ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Jirí Podpiera

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

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