Rise of Domestic Banks in EME Cross-border Credit Intermediation

83 Pages Posted: 15 Jan 2021 Last revised: 15 Jun 2024

See all articles by Sheila Jiang

Sheila Jiang

University of Florida - Department of Finance, Insurance and Real Estate

Douglas Xu

University of Florida - Warrington College of Business Administration

Date Written: March 1, 2020

Abstract

This paper provides a novel angle to explain the increased interconnectedness and comovement between EME economic conditions and the U.S. financial conditions since 1990s. We document the rise of domestic global banks in EMEs and the growingly important role they have played in channeling cross-border loans since the 1990s. We further provide evidence that this structural change in the lender composition channeling EME cross-border loans is likely to be driven by the transformation of the U.S. financial market since the end of the 1980s and lasting till 1995, marked by the end of S&L crisis and the expansion of mutual funds and money market funds following S&L's collapse. Using detailed documentation on cross-border syndicated loans, we demonstrate that foreign and domestic lenders have drastically different preferences on lending bases when extending credit to corporations in EMEs: foreign lenders exhibit a much higher reluctance to lend against hard assets as collateral. Inspired by these micro-level findings, we demonstrate that the rise of domestic global banks in transmitting cross-border credit to EMEs can have a far-reaching impact on these economies at the aggregate level. Utilizing the collapse of S&L crisis and the following expansion of U.S. mutual funds and money funds as an exogenous shock to the global funding market for EMEs, we identify that the rise of domestic global banks in EMEs can greatly i) reshape the industry structure of these economies and ii) increase the economies' susceptibility to global financing cycles.

Keywords: Banking globalization, Shadow Banking Institutions, Cross-border credit, Collateralized lending, Emerging market, Contracting, Collateral JEL codes: G15, G23, G21, G32, F34

JEL Classification: G15, G23, G21, G32, F34

Suggested Citation

Jiang, Sheila and Xu, Douglas, Rise of Domestic Banks in EME Cross-border Credit Intermediation (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3727402 or http://dx.doi.org/10.2139/ssrn.3727402

Sheila Jiang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Douglas Xu

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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