Working Paper: NBER ID: w15974
Authors: Nicola Cetorelli; Linda S. Goldberg
Abstract: Global banks played a significant role in the transmission of the 2007 to 2009 crisis to emerging market economies. We examine the relationships between adverse liquidity shocks on main developed-country banking systems to emerging markets across Europe, Asia, and Latin America, isolating loan supply from loan demand effects. Loan supply in emerging markets was significantly affected through three separate channels: a contraction in direct, cross-border lending by foreign banks; a contraction in local lending by foreign banks' affiliates in emerging markets; and a contraction in loan supply by domestic banks resulting from the funding shock to their balance sheet induced by the decline in interbank, cross-border lending. Policy interventions, such as the Vienna Initiative introduced in Europe, influenced the lending channel effects on emerging markets of head office balance sheet shocks.
Keywords: global banks; international shock transmission; financial crisis; emerging markets; liquidity shocks
JEL Codes: F36; F42; G01; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adverse liquidity shocks to developed-country banks (F65) | Contraction in cross-border lending in emerging markets (F65) |
| Adverse liquidity shocks to developed-country banks (F65) | Reduction in local lending by foreign affiliates in emerging markets (F65) |
| Adverse liquidity shocks to developed-country banks (F65) | Decrease in domestic banks' loan supply due to funding shocks (F65) |
| Contraction in cross-border lending in emerging markets (F65) | Reduction in loan supply in emerging markets (F65) |
| Reduction in local lending by foreign affiliates in emerging markets (F65) | Reduction in loan supply in emerging markets (F65) |
| Decrease in domestic banks' loan supply due to funding shocks (F65) | Reduction in loan supply in emerging markets (F65) |
| Higher ex ante vulnerability of banking systems (F65) | Greater reductions in lending growth (G21) |