The Procyclicality of Foreign Bank Lending: Evidence from the Global Financial Crisis
46 Pages Posted: 16 Jul 2013
Date Written: July 12, 2013
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
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