March 21, 2018

Transmission of shocks via international banks

Cross-border linkages of banks can transmit liquidity shocks from one country to another. This has become obvious during the recent financial crisis, where internationally active banks played an important role in the transmission of shocks. A liquidity shock can be transferred from one country abroad to the domestic country due to three possible channels. Firstly, the liquidity shock abroad can be transferred through a reduction of direct cross-border loan supply by foreign banks. Secondly, due to the liquidity shock abroad, local affiliates of a foreign-owned bank can reduce their lending activities in the host country. This can be attributed to the fact that globally active banks are able to reallocate their funds across borders. Thus, they can better compensate liquidity shocks at home by reallocating funds from their foreign affiliates to their head office. Thirdly, a liquidity shock abroad can be transmitted through domestic banks due to a reduction of local lending. This might happen if banks located in the country in which the liquidity shock originates adjust their cross-border activities. As a result cross-border interbank lending might decline such that domestic banks face a funding shock to their balance sheet. This, in turn, might induce a reduction of domestic loan supply.

Published papers

Aiyar, S. (2012). From financial crisis to great recession: The role of globalized banksAmerican Economic Review 102(3): 225-230.

Anginer, D., E. Cerutti, and M. Peria (2017). Foreign Bank Subsidiaries’ Default Risk during the Global Crisis: What Factors Help Insulate Affiliates from their Parents?. Journal of Financial Intermediation 29: 19-31.

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Blasques, F., S.J. Koopman, A. Lucas and J. Schaumburg (2016). Spillover dynamics for systemic risk measurement using spatial financial time series models Journal of Econometrics 195(2): 211-223.

Cetorelli, N., and L.S. Goldberg (2011). Global banks and international shock transmission: Evidence from the crisis. IMF Economic Review59(1): 41-76.

Cetorelli, N., and L.S. Goldberg (2012). Banking globalization and monetary transmission. Journal of Finance 67(5): 1811-1843.

Cetorelli, N., and L.S. Goldberg (2012). Follow the money: Quantifying domestic effects of foreign bank shocks in the great recession.American Economic Review 102(3): 213- 218.

Cetorelli, N., and L.S. Goldberg (2012). Liquidity management of U.S. global banks: Internal capital markets in the great recession. Journal of International Economics 88(2): 299-311.

Cornett, M.M., J.J. McNutt, P.E. Strahan, and H. Tehranian (2011). Liquidity risk management and credit supply in the financial crisis. Journal of Financial Economics 101(2): 279-312.

De Haas, R., and N. van Horen (2012). International shock transmission after the Lehman Brothers collapse: Evidence from syndicated lending. American Economic Review 102(3): 231–237.

De Haas, R., and N. van Horen (2013). Running for the exit? International bank lending during a financial crisis. Review of Financial Studies26(1): 244-285.

De Haas, R., Y. Korniyenko, A. Pivovarsky, and T. Tsankova (2015). Taming the herd? Foreign banks, the Vienna Initiative and crisis transmission. Journal of Financial Intermediation 24(3): 325-355.

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De Haas, R., and I. van Lelyveld (2014). Multinational banks and the global financial crisis: Weathering the perfect storm? Journal of Money, Credit, and Banking 46(1): 333-364.

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Kalemli-Ozcan, S., E. Papaioannou, and F. Perri (2013). Global banks and crisis transmission. Journal of International Economics 89(2): 495-510.

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Working and discussion papers

Ahnert, T., and E.C. Perotti (2015). Cheap but flighty: how global imbalances create financial fragility. CEPR Discussion Paper DP10502.

Aisen, A., and M. Franken (2010). Bank credit during the 2008 financial crisis: A cross-country comparison. IMF Working Paper 10/47.

Altavilla, C., M. Pagano and S. Simonelli (2016). Bank Exposures and Sovereign Stress Transmission. CEPR Discussion Paper 11269.

Dell’Ariccia, G., M. S. M. Peria, D. O. Igan, E. A. Awadzi, M. Dobler, and D. Sandri (2018). Trade-offs in Bank Resolution. IMF Staff Discussion Notes No. 18/02.

Baskaya, Y., J. di Giovanni, S. Kalemli-Ozcan, and M. F. Ulu (2017). International Spillovers and Local Credit Cycles. CEPR Working Paper 11839.

Beck, T., S. Da-Rocha-Lopes, and A. Silva (2017): Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins. CEPR Discussion Paper 12058.

Berger, A. N., T.Makaew, and R. Turk-Ariss (2018). Who Pays for Financial Crises? Price and Quantity Rationing of Different Borrowers by Domestic and Foreign Banks. IMF Working Paper No. 18/158.

Bernard, B., A. Capponi, and J. E. Stiglitz (2017). Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability. NBER Working Paper No. 23747.

Bräuning, F., and V. Ivashina (2017). Monetary Policy and Global Banking. NBER Working Paper 23316.

Buch, C., C. Koch, and M. Koetter (2016). Crises and rescues: liquidity transmission trough international banks. BIS Working Papers No 576.

Buch, C., M. Bussiere, L. Goldberg, and R. Hills (2018). The International Transmission of Monetary Policy. NBER Working Paper No. 24454.

Castiglionesi, F., F. Feriozzi, and G. Lorenzino (2017). Financial Integration and Liquidity Crises. NBER Working Paper 23359.

Cerutti, E., S. Claessens, and P. McGuire (2012). Systemic risks in global banking: What available data can tell us and what more data are needed? NBER Working Paper 18531.

Cetorelli, N., and L. S. Goldberg (2009). Globalized banks: Lending to emerging markets in the crisis. Federal Reserve Bank of New York Staff Report No. 377.

Chinazzi, M., and G. Fagiolo (2015). Systemic Risk, contagion, and financial networks: A survey. LEM Working Paper Series 08/2013.

Correa, R., L. Goldberg, and T. Rice (2014). Liquidity risk and U.S. bank lending at home and abroad. New York FED Staff Reports N°676.

Correa, R., H. Sapriza, and A. Zlate (2013). Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis. FRB International Finance Discussion Paper 1059.

De Haas, R., and N. van Horen (2010). The crisis as a wake-up call. Do banks tighten screening and monitoring during a financial crisis? DNB Working Papers 255.

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Fender, I., and P. McGuire (2010). Bank structure, funding risk and the transmission of shocks across countries: Concepts and measurement. BIS Quarterly Review, September 2010. Available at SSRN: http://ssrn.com/abstract=1672632.

Gagnon, J., T. Bayoumi, J. Londono, C. Saborowski, and H. Sapriza (2017). Direct and Spillover Effects of Unconvential Monetary and Exchange Rate Policies. IMF Working Paper No. 17/56.

Gattini, L., and A. Zagorisiou (2016). Cross border banking: Pull-push effects of parent banks on subsidiaries’ credit extensions, EIB Working Papers 2016/07.

Gropp, R., and D. Radev (2017). International Banking Conglomerates and the Transmission of Lending Shocks Across Borders, SAFE Working Paper No. 175.

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Hale, G., T. Kampan, and C. Minoiu (2016). Crisis transmission through the global banking network. Federal Reserve Bank of San Francisco Working Paper 2016-01.Available at SSRN: http://ssrn.com/abstract=2747562

Heitfield, E., G. Richardson, and S. Wang (2017) . Contagion During the Initial Banking Panic of the Great Depression. NBER Working Paper No. 23629.

Huidrom, R., M. A. Kose, and F. L. Ohnsorge (2017). How Important are Spillovers from Major Emerging Markets? World Bank Group Policy Research Working Paper 8093.

Igan, D., A. Kutan, and A. Miraze (2016). Real Effects of Capital Inflows in Emerging Markets. IMF Working Paper No. 16/235.

Kapan, T., and C. Minoiu (2013). Balance sheet strength and bank lending during the global financial crisis. IMF Working Papers 13/102.

Kose, A., C. Lakatos, F. Ohnsorge, and M. Stocker (2017). The Global Role of the U.S. Economy: Linkages, Policies and Spillovers. CEPR Working Paper 11836.

Obstfeld, M., J. D. Ostry, and M. S. Qureshi (2018). Global Financial Cycles and the Exchange Rate Regime: A Perspective from Emerging Markets. CEPR Discussion Paper No. 12696.

Ongena, S., J.-L. Peydró, and N. van Horen (2015). Shocks abroad, pain at home? Bank-firm level evidence on the international transmission of financial shocks. European Banking Center Discussion Paper No. 2013-007.

Peltonen, T.A., M. Rancan, and P. Sarlin (2015). Interconnectedness of the banking sector as a vulnerability to crises. ECB Working Paper Series 1866/2015.

Popov, A., and G. Udell (2010). Cross-border banking and the international transmission of financial distress during the crisis of 2007-2008. European Central Bank Working Paper 1203/2010.

Popov, A., and N. van Horen (2013). The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis. De Nederlandsche Bank Working Paper No. 382.

Singh, M., and Z. Alam. (2018). Leverage – A broader view. IMF Working Paper No. 18/62.

Takáts, E. (2010). Was it credit supply? Cross-border bank lending to emerging market economies during the financial crisis. BIS Quarterly Review June 2010.

Takáts, E., and J. Temesvary (2016). The currency dimension of the bank lending channel in international monetary transmission. BIS Working Papers No 600.

Other articles

Buch, C.M., J. Chapman, and L. Goldberg (2014). Transmission of liquidity risk through global banks: An International Banking Research Network project. www.voxeu.org.

Cai, J., A. Saunders and S. Steffen (2016). Syndication, Interconnectedness, and Systemic Risk. Mimeo. Galindo, A.J., A. Izquierdo, and L. Rojas-Suarez (2013). Financial integration and foreign banks in Latin America: How do they impact the transmission of external financial shocks?, in Bang Nam Jeon , María Pía Olivero (ed.) Global Banking, Financial Markets and Crises (International Finance Review, Volume 14) Emerald Group Publishing Limited, pp.305 – 339.

Götz, M.R., L. Leaven, and R. Levine (2016). Geographic expansion reduces banks’ risk: New evidence. www.voxeu.org.