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Cross-Border Banking and the International Transmission of Financial Distress During the Crisis of 2007-2008

51 Pages Posted: 9 Jun 2010  

Alexander A. Popov

European Central Bank (ECB)

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 17, 2010

Abstract

We study the effect of financial distress in foreign parent banks on local SME financing in 14 central and eastern European countries during the early stages of the 2007-2008 financial crisis. We use survey data on applicant and non-applicant firms that enable us to disentangle effects driven by shocks to the banking system from recession-driven demand shocks that may vary across lenders. We find strong evidence that credit tightened in the relatively early stages of the crises caused by the following types of bank financial distress: 1) low equity ratio; 2) low Tier 1 capital ratio; and 3) losses on financial assets. We also find that foreign banks transmit to Main Street a larger portion of similar financial shocks than domestic banks. The observed decline in credit is greater among high-risk firms and firms with fewer tangible assets.

Keywords: credit crunch, financial crisis, bank lending channel, business lending

JEL Classification: E44, E51, F34, G21

Suggested Citation

Popov, Alexander A. and Udell, Gregory F., Cross-Border Banking and the International Transmission of Financial Distress During the Crisis of 2007-2008 (May 17, 2010). ECB Working Paper No. 1203. Available at SSRN: https://ssrn.com/abstract=1610193

Alexander A. Popov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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