Who Lends Before Banking Crises? Evidence from the International Syndicated Loan Market

Abstract

Existing theories and empirical studies often assume that all lenders have similar incentives to take on risks in different phases of the lending cycle. We show that foreign lenders and low-market-share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. These less established lenders also increase the amount of credit they extend to riskier borrowers, without asking for collateral or imposing covenants and higher interest rates. Our results suggest that foreign lenders and low-market-share lenders contribute disproportionately to risk accumulation in pre-crisis periods.

Keywords: Foreign banks, crises, credit booms

JEL Classification: G21, F3