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.