Working Paper: CEPR ID: DP8337
Authors: Mariassunta Giannetti; Luc Laeven
Abstract: In the context of the global market for syndicated bank loans, we provide evidence that the collapse of international markets during financial crises can in part be explained by a flight home effect. We show that the home bias of lenders? loan origination increases by approximately 20 percent if the bank?s country of origin experiences a banking crisis. Banks with less stable funding sources, being more vulnerable to liquidity shocks, exhibit a stronger flight home effect. This flight home effect is distinct from a flight to quality effect because borrowers in emerging markets and advanced economies are similarly affected by the lenders? portfolio rebalancing in favor of domestic borrowers. Similarly, the flight home of international lenders does not appear to be exclusively away from countries with weak investor protection or from borrowers with lower credit ratings. Overall, the results indicate that the home bias of international capital allocation tends to increase in the presence of adverse economic shocks affecting the net wealth of international investors.
Keywords: home bias; financial crisis; flight to quality; syndicated loans
JEL Codes: F4; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking crises (G01) | home bias of lenders in the syndicated loan market (G21) |
| negative shocks to banks' net wealth (F65) | home bias of lenders in the syndicated loan market (G21) |
| banking crises (G01) | foreign banks decrease loans to foreign borrowers (F65) |
| home country economic conditions (F29) | international lending behavior (F34) |
| banking crises (G01) | reallocation of loan portfolios towards domestic borrowers (F65) |