Financial Globalization and the Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market
44 Pages Posted: 9 Mar 2011
Date Written: December 2010
I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its impact on 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 bank-to-bank lending establishes an international transmission channel for liquidity shocks and that foreign bank ownership mitigates, rather than amplifies, the transmission through this channel.
Keywords: Keywords: Bank Liquidity Shocks, Credit Supply Shocks, Foreign-owned Banks, Bank Lending Channel, Emerging Markets, Financial Contagion
JEL Classification: G21, F34, O19
Suggested Citation: Suggested Citation