The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises

Posted: 31 Jul 2011

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: July 30, 2011

Abstract

In the context of the global market for syndicated bank loans, we provide evidence that the collapse of international markets during financial crises can in part be explained by a flight home effect. We show that the home bias of lenders’ loan origination increases by approximately 20 percent if the bank’s country of origin experiences a banking crisis. This flight home effect is distinct from a flight to quality effect because borrowers of different quality (or from countries with different degree of investor protection) are similarly affected by lenders rebalancing their loan portfolios in favor of domestic borrowers. Banks with less stable funding sources and larger losses, being more vulnerable to liquidity shocks, exhibit a stronger flight home effect. Overall, the results indicate that the home bias of international capital allocation tends to increase in the presence of adverse economic shocks affecting the net wealth of international investors. We provide evidence suggesting that the degree of proximity to the domestic market affects the perceived risk and expected returns of banks experiencing negative shocks.

Suggested Citation

Giannetti, Mariassunta and Laeven, Luc A., The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises (July 30, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898961

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
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SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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