Working Paper: CEPR ID: DP10927
Authors: Philippe Bacchetta; Ouarda Merrouche
Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
Keywords: Corporate debt; Credit crunch; Foreign banks; Money market
JEL Codes: E44; G21; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic credit crunch (E51) | Increase in dollar borrowing from foreign banks (F65) |
| Disruptions in euro interbank market (F65) | Increase in dollar borrowing from foreign banks (F65) |
| Tightening of domestic credit standards (G21) | Increased reliance on foreign currency loans (F65) |
| Increased cost of swapping euro into dollars (F31) | Increased demand for dollar credit (E51) |
| Riskier borrowers (G21) | Increase in dollar borrowing from foreign banks (F65) |
| Foreign banking (F65) | Alleviated financial constraints (G59) |