The Procyclicality of Foreign Bank Lending: Evidence from the Global Financial Crisis

46 Pages Posted: 16 Jul 2013

Date Written: July 12, 2013

Abstract

We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.

Keywords: foreign banks, credit crunch, bank balance sheet channel, functional distance

JEL Classification: E44, G15, G14, G21

Suggested Citation

Albertazzi, Ugo and Bottero, Margherita, The Procyclicality of Foreign Bank Lending: Evidence from the Global Financial Crisis (July 12, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 926. Available at SSRN: https://ssrn.com/abstract=2293922 or http://dx.doi.org/10.2139/ssrn.2293922

Ugo Albertazzi

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Margherita Bottero (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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