Foreign banks and international shock transmission: Does bank ownership still matter?

Ying Xu, Hai Anh La

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3 Citations (Scopus)
2 Downloads (Pure)

Abstract

This paper studies the recent 2007-2009 Global Financial Crisis (GFC) and its transmission through bank lending to emerging Asia economies. It highlights two channels of shock transmission identified in the literature: bank ownership and liquidity. We employ a unique dataset on new loan issuance to Asian borrowers and apply a recently developed method (Khwaja and Mian, 2008. Am. Econ. Rev. 98, 1413-1442) to address the identification problem in examining bank lending and shock transmission. We find that bank ownership does not play a substantial role in the transmission process. It is the liquidity channel measured by lending in foreign currencies that is mainly responsible for the transmission of the GFC to the loan market in Asia. Additionally, our results suggest that the contraction of foreign currency liquidity is partially substituted by domestic currency lending. However, the substitution occurs only within banks and not between banks, owing to high switching costs. Our results are robust according to a number of sensitivity analyses.
Original languageEnglish
Pages (from-to)200-216
Number of pages17
JournalJournal of International Financial Markets, Institutions and Money
Volume38
DOIs
Publication statusPublished - 1 Sep 2015
Externally publishedYes

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Foreign banks
Bank ownership
Liquidity
Lending
Global financial crisis
Foreign currency
Bank lending
Asia
Loans
Identification problem
Switching costs
Substitution
Contraction
Currency
Emerging Asia

Cite this

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title = "Foreign banks and international shock transmission: Does bank ownership still matter?",
abstract = "This paper studies the recent 2007-2009 Global Financial Crisis (GFC) and its transmission through bank lending to emerging Asia economies. It highlights two channels of shock transmission identified in the literature: bank ownership and liquidity. We employ a unique dataset on new loan issuance to Asian borrowers and apply a recently developed method (Khwaja and Mian, 2008. Am. Econ. Rev. 98, 1413-1442) to address the identification problem in examining bank lending and shock transmission. We find that bank ownership does not play a substantial role in the transmission process. It is the liquidity channel measured by lending in foreign currencies that is mainly responsible for the transmission of the GFC to the loan market in Asia. Additionally, our results suggest that the contraction of foreign currency liquidity is partially substituted by domestic currency lending. However, the substitution occurs only within banks and not between banks, owing to high switching costs. Our results are robust according to a number of sensitivity analyses.",
keywords = "Asia, Bank lending, Financial crisis, Foreign banks, Foreign currency loans, Shock transmission, Syndicated loan markets",
author = "Ying Xu and La, {Hai Anh}",
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doi = "10.1016/j.intfin.2015.05.006",
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journal = "Journal of International Financial Markets, Institutions and Money",
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T1 - Foreign banks and international shock transmission: Does bank ownership still matter?

AU - Xu, Ying

AU - La, Hai Anh

PY - 2015/9/1

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AB - This paper studies the recent 2007-2009 Global Financial Crisis (GFC) and its transmission through bank lending to emerging Asia economies. It highlights two channels of shock transmission identified in the literature: bank ownership and liquidity. We employ a unique dataset on new loan issuance to Asian borrowers and apply a recently developed method (Khwaja and Mian, 2008. Am. Econ. Rev. 98, 1413-1442) to address the identification problem in examining bank lending and shock transmission. We find that bank ownership does not play a substantial role in the transmission process. It is the liquidity channel measured by lending in foreign currencies that is mainly responsible for the transmission of the GFC to the loan market in Asia. Additionally, our results suggest that the contraction of foreign currency liquidity is partially substituted by domestic currency lending. However, the substitution occurs only within banks and not between banks, owing to high switching costs. Our results are robust according to a number of sensitivity analyses.

KW - Asia

KW - Bank lending

KW - Financial crisis

KW - Foreign banks

KW - Foreign currency loans

KW - Shock transmission

KW - Syndicated loan markets

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DO - 10.1016/j.intfin.2015.05.006

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JF - Journal of International Financial Markets, Institutions and Money

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