Global Banks and International Shock Transmission: Evidence from the Crisis

Nicola Cetorelli, Linda S. Goldberg

NBER Working Paper No. 15974
Issued in May 2010
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w15974

Published: Nicola Cetorelli & Linda S Goldberg, 2011. "Global Banks and International Shock Transmission: Evidence from the Crisis," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 41-76, April. citation courtesy of

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