Loans From My Neighbors: East Asian Commercial Banks, Banking Integration, and Bank Default Risk

34 Pages Posted: 18 Sep 2020

See all articles by Dung Thuy Thi Nguyen

Dung Thuy Thi Nguyen

Academy of Finance; University of Otago - Department of Accountancy and Finance

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago

Helen Roberts

University of Otago - Department of Accountancy and Finance

Minh Le

Faculty of Finance and Banking, University of Economics and Law, VNU-HCM, Vietnam

Date Written: September 18, 2020

Abstract

This study investigated the impact of banking integration on recipient country bank default risk and, in particular, whether the type of banking integration moderates that relationship. Using the system generalized method of moments (GMM), the study found that banking integration lowers bank default risk in recipient countries. The foreign claims that Asian lenders extend and the foreign claims that banks extend via local affiliates primarily drive the impact. These results show that the close proximity of lenders and borrowers or “local” knowledge via an affiliate’s presence alleviates information asymmetry, allowing for effective monitoring and disciplining of the loan relationship. The result supports the fostering of banking integration, promoting deeper intra-regional connectedness throughout East Asia. Where foreign claims come from outside East Asia, policy makers should encourage their presence through local affiliates, as this has an equivalent impact.

Keywords: banking integration, international banking claims, default risk, information asymmetry, East Asia

JEL Classification: G21, G28, F36

Suggested Citation

Thuy Thi Nguyen, Dung and Diaz-Rainey, Ivan and Roberts, Helen and Le, Minh, Loans From My Neighbors: East Asian Commercial Banks, Banking Integration, and Bank Default Risk (September 18, 2020). ADBI Working Paper 1113, Available at SSRN: https://ssrn.com/abstract=3694860 or http://dx.doi.org/10.2139/ssrn.3694860

Dung Thuy Thi Nguyen (Contact Author)

Academy of Finance ( email )

8 Phan Huy Chu
Phan Chu Trinh Street
Hanoi
Vietnam

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago ( email )

Dunedin
New Zealand

Helen Roberts

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand
6434798072 (Phone)
6434798171 (Fax)

Minh Le

Faculty of Finance and Banking, University of Economics and Law, VNU-HCM, Vietnam ( email )

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