Channels and Determinants of Foreign Bank Lending

40 Pages Posted: 19 Oct 2015

See all articles by Torsten Ehlers

Torsten Ehlers

Bank for International Settlements (BIS)

Philip D. Wooldridge

Bank for International Settlements (BIS)

Date Written: October 2015

Abstract

Recent crises invigorated debate about the financial stability risks associated with different forms of foreign bank lending. Would a more decentralised model of international banking – in which a greater proportion of international banking business is carried out in the country where banks operate rather than across borders – be more desirable from a financial stability point of view? This paper sheds light on aspects of this debate by using the BIS international banking statistics to investigate the channels through which foreign banks might transmit shocks across borders and to analyse the determinants of banks’ decision whether to lend locally or cross-border. Focusing on the Asia-Pacific region, we find increasing concentration among foreign bank creditors, owing in part to the rising market share of banks headquartered within the region. Thus the region continues to be vulnerable to shocks in individual creditor countries. That said, foreign banks’ share of aggregate bank credit is low in all but a few Asia-Pacific countries. We also find that the state of the banking system in the borrower country has a significant influence on the form of foreign lending. Intermediation by foreign banks takes the form of local lending where banking systems are relatively more fragile or less developed, and cross-border lending where banking systems are relatively more stable or advanced.

Full publication: Cross-Border Financial Linkages: Challenges for Monetary Policy and Financial Stability

Keywords: Global banks, international lending, financial integration

JEL Classification: F34, F36, F65, G21

Suggested Citation

Ehlers, Torsten and Wooldridge, Philip D., Channels and Determinants of Foreign Bank Lending (October 2015). BIS Paper No. 82c. Available at SSRN: https://ssrn.com/abstract=2668667

Torsten Ehlers (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Philip D. Wooldridge

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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