Working Paper: NBER ID: w17356
Authors: Galina Hale
Abstract: The importance of information asymmetries in the capital markets is commonly accepted as one of the main reasons for home bias in investment. We posit that effects of such asymmetries may be reduced through relationships between banks established through bank-to-bank lending and provide evidence to support this claim. To analyze dynamics of formation of such relationships during 1980-2009 time period, we construct a global banking network of 7938 banking institutions from 141 countries. We find that recessions and banking crises tend to have negative effects on the formation of new connections and that these effects are not the same for all countries or all banks. We also find that the global financial crisis of 2008-09 had a large negative impact on the formation of new relationships in the global banking network, especially by large banks that have been previously immune to effects of banking crises and recessions.
Keywords: bank relationships; business cycles; financial crises; information asymmetries
JEL Codes: F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| recessions and banking crises (G01) | formation of new connections among banks (F65) |
| local economic conditions (R11) | banking relationships (G21) |
| global financial crisis of 2008-2009 (F65) | formation of new connections among banks (F65) |
| recessions (E32) | decline in number of key banks (G21) |
| local banking crises (F65) | decrease in new borrowing connections (F65) |
| formation of new connections (D85) | subsequent lending and borrowing activities (G21) |