PRELIMINARY AND INCOMPLETE—PLEASE DO NOT CITE
What do 30 years of crises tell us about the transmission of banking shocks?
Evidence from U.S. banks’ foreign exposures
Ricardo Correa
Board of Governors of the Federal Reserve System
Bill Goulding
MIT Sloan School of Management
Juan C. Gozzi Valdez
University of Warwick
Tara Rice*
Board of Governors of the Federal Reserve System
November 2013
Abstract
This paper examines U.S. banks’ foreign exposures from 1977 through 2012, a period covering
both domestic and global banking crises originating in emerging market economies, Japan,
Europe, and the United States. It uses novel dataset of U.S. banks’ foreign claims to identify
changes in the supply of funds to foreign residents, focusing specifically on changes in foreign
claims during periods of banking crisis. To our knowledge, it is the first to the study the
transmission of banking shocks over multiple crisis periods using U.S. bank-level data on
exposures to foreign countries over a long time horizon. Our preliminary results suggest that
U.S. banks have experienced “common lender” effects as a result of their exposure to banking
crisis countries over the last 30 years. In addition, we find that having a local presence in a
country does not make U.S. banks claims on that country to be more “sticky” when faced with
potential losses due to exposures to a crisis country.
JEL Classification: G21, G01.
Keywords: Financial contagion, common lender effects, banking crises.
*
We appreciate the helpful comments from conference participants at the 2012 International Atlantic Economic
Conference. Contact information: Ricardo.Correa@frb.gov, Bill.Goulding@sloan.mit.edu, J.C.GozziValdez@warwick.ac.uk and Tara.N.Rice@frb.gov. Authors are from the Division of International Finance. The
views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the view of
the Board of governors or the staff of the Federal Reserve System.
The concept of financial contagion gained notoriety after the Asian, Latin American, and
Russian crises of the 1990s (Allen and Gale 2000). In that period, shocks originated in those
regions led to pullbacks by advanced economy banks from other countries (Heid et al. 2005; Van
Rijckeghem and Weder 2003; Schnabl 2012). The recent global financial crisis brought to the
forefront those same concerns, as banks in advanced economies were in the middle of a systemic
banking crisis that threatened the supply of credit to countries that borrowed from these banks
(Cerutti 2013).
This paper uses supervisory information on individual U.S. banks’ foreign claims to
identify changes in the supply of funds to foreign residents from 1977 through 2011, with a focus
on changes in claims during periods of systemic banking crisis. In particular, we test for the
significance of “common lender” effects (Van Rijckeghem and Weder (2003). That is, banks’
decrease in credit to a country after experiencing losses in another country. In addition, we study
the relevance of banks’ business models, and their balance sheet strength, as determinants of
these common lender effects.
Large global banks are an important source of credit to borrowers in advanced and
emerging economies and reductions in their lending patterns may adversely affect these
economies. During the recent European sovereign crisis, international banks from core European
countries reduced their previously large exposures in peripheral Europe, further exacerbating
economic problems in those countries.
U.S. banks have not been immune to swings in their international exposures over the last
30 years. As Figure 1 shows, claims on foreign residents trended up in the late 1970s and early
1980s, but after this period U.S. banks decreased their international exposures (in real terms) for
10 years after suffering significant losses during the Latin American crisis of the mid-1980s.
1
Exposures increased again in the late 1990s and 2000s, but as a proportion of assets, as shown in
Figure 2, have remained in a range between 15 percent and 20 percent of assets. Even with this
downward trend, U.S. banks rank second amongst the largest lenders to emerging market
economies, behind U.K. banks, with U.S. banks claims on residents of emerging market
countries totaling $740 billion as of September 2012.
During periods of financial stress, global banks reduce exposures to foreign countries
because of balance sheet problems or to repatriate capital back to the home country (Cetorelli
and Goldberg 2012). Because this reduction may exacerbate economic problems in the host
country, some regulators have floated proposals to restrict the ability of a global bank to
reallocate funds to the home country and to require the domestic operations of global banks that
they host to be separately capitalized (Rosengren 2009). Such regulations, however, may inhibit
free movement of funds across borders, hindering development in countries seeking foreign
financing. Therefore, understanding both the flows of bank funds into and out of countries
around crisis periods are critical in creating effective international banking policies and
regulations going forward.
Our preliminary results suggest that U.S. banks have experienced common lender effects
as a result of their exposure to banking crisis countries over the last 30 years. This finding is
robust to excluding the global financial crisis of 2008-2009. In addition, we find that having a
local presence in a country does not make U.S. banks claims on that country to be more “sticky”
when faced with potential losses due to exposures to a crisis country.
A large literature has studied international banking crises, addressing both the causes and
consequences of crises in advanced and emerging market economies. To our knowledge,
however, just one study examines an advanced economy’s bank flows prior to and over crisis
2
periods using detailed bank-level information, as these data are generally confidential. Heid et
al. (2005) examine German bank lending during the Asian and Russian crisis. These authors’
study is limited to a period covering three years and addresses the pattern of German bank
lending during two financial crises in emerging markets.
In contrast, our study analyzes U.S. banks’ cross border lending and lending through
foreign offices over a 30-year period spanning over more than a dozen banking crises. The
breadth and depth of our study allows us to distinguish between crises originating in emerging
market economies versus advanced economies and to identify changes in international exposures
explained by shifts in the demand for loans from changes arising from banks’ supply of credit.
To our knowledge, it is the first to the study the transmission of banking shocks over crisis
periods using U.S. bank-level data on exposures to foreign countries over such a long time
horizon.
I.
Empirical methodology
A difficulty in testing for bank lending supply effects is disentangling the effect of a
shock on loan demand from that of the supply of credit. Our data allow us to distinguish
between changes in the supply of credit to residents of a particular foreign country by using
banking crises in unrelated countries to which the bank is exposed as a supply shock to the bank.
This strategy has been use in previous studies (Schnabl (2012)), and is included in our core tests.
To test our first hypothesis, that is, whether common lender effects are a significant
feature of international banking, we use a panel specification to regress changes in a bank’s
exposure to a given country on a variable that represents that bank’s aggregate exposure to
3
countries in crisis. We include as controls a number of variables that describe the bank’s
financial condition and distribution of claims. The estimating equation is defined as follows:
Lbct = β * Exposureto crisesbt + γ * X bt −1 + θ ct + ϑb + ε bct
(1)
Where X are bank level controls lagged by one period; θ are country-time fixed effects
and ϑ are bank fixed effects. Changes in exposure, our dependent variable, is scaled by the
banks’ assets, while exposures to banking crises (Exposure to crises), our key explanatory
variable, is scaled by banks’ equity. In this way, we are considering a bank’s exposure to a
banking crisis in the context of its potential effect on the bank’s capitalization level. We
construct our indicator for banks’ exposures to banking crises by summing individual banks’
claims to countries enduring a banking crisis, as defined by Laeven and Valencia (2012). While
our data are available at a quarterly frequency, we use a yearly frequency in our regressions to
conform to this literature and to ameliorate problems associated with the precision in dating
crises.
The disaggregated nature of our data allows us to include bank fixed effects in various
specifications. These variables, in combination with country and year fixed effects control for a
number of potential endogeneity problems and provide an opportunity to examine the robustness
of our results. For example, the inclusion of country-time fixes effects in specification (1) allows
us to interpret the results as changes in claims to the same country in a given year by U.S.
institutions with different levels of exposure to banking crises.
To test our second hypothesis, that is, the role of banks’ business models in exacerbating
common lender effects, we define a dummy variable indicating whether the bank holds
exposures through a local office in the host country. Then, we interact this dummy with our
4
measure of the banks’ exposure to crisis countries. The inclusion of these terms allows us to
analyze whether banks suffering a shock due to their exposure to countries in crisis are less likely
to pull back from other countries where they have local offices.
II.
Data
We combine the Federal Financial Institutions Examination Council (FFIEC) Country
Exposure Report (CER) with the Consolidated Report of Condition and Income (Call Report).
The CER contains information on the distribution, by country, of exposures to foreigners. The
FFIEC requires U.S. banks and bank holding companies with claims on residents of foreign
countries equal to or in excess of $30 million to report this information each quarter. Exposures
are broken down by country of immediate and ultimate guarantor and type of claim. Our dataset
contains quarterly observations from December 1977 through June 2012 of U.S. bank claims (on
non-U.S. residents) to each country for which the individual banks have claims. With an average
of 108 banks reporting each quarter, these banks have exposures to anywhere from 2 to 90
countries.
As shown in Figure 3, U.S. banks’ exposures to foreign residents have shifted across
geographical regions over the last 30 years. From focusing on emerging market economies in
the 1980s, banks turned their business towards Europe in in the 2000s.
The top three
counterparties, as reported in Table 1, are residents from the United Kingdom, Japan, and
Germany.
Figure 4 shows the exposures of U.S. banks to countries suffering a banking crisis, as
defined by Laeven and Valencia (2012), by year. There are four notable peaks in the level of
5
exposures: the Latin American crisis in the early 1980s, the Mexican crisis in 1994, the East
Asian and Russian crisis in the late 1990s, and the global financial crisis in the late 2000s.
In our main specification, we control for banks’ balance sheet characteristics. We add to
the dataset information on banks consolidated financial statements collected on the FR Y-9C and
the FFIEC 031 reports. As reported in Table 2, the average size of the banks in the sample is
relatively large at $92 billion, and it is well capitalized with an average equity to assets ratio of
almost 7 percent.
III.
Results
Table 5 shows the results of estimating specification (1) using the change in total bank
claims on residents of country c as a fraction of the bank’s total assets as the dependent variable.
This specification is estimated with all countries in the sample, that is, including U.S. banks
exposures to countries experiencing a banking crisis. The coefficient of interest is that of the
Total claims on crisis countries/equity (or Exposure to crises in (1)) measure. This coefficient is
negative and significant across all specifications. Thus, banks’ exposures to systemic banking
crisis events do force banks to reduce their level of foreign claims. In columns (e) and (f), we
exclude observations from the recent global financial crisis to check whether that episode is
driving our results. However, the coefficient of interest remains negative and significant.
Next we test directly our first hypothesis, whether common lender effects are a
significant feature of banking crisis. In the estimations shown in Table 4, we exclude U.S.
banks’ exposures to residents of countries experiencing the first year of a systemic banking
crisis. Again, the coefficient of interest is on Total claims on crisis countries/equity, which is
negative and significant across all specifications. These results are evidence that common lender
6
effects are important and that U.S. banks’ have cut back exposures from third-countries when
they have been exposed to banking crises in other countries.
In the previous set of results, we used the change in foreign exposures relative to the
bank’s assets as our dependent variable. As a robustness check, we estimate (1) using the log
change in foreign exposures as the dependent variable. The results are shown in Table 5. The
coefficient on the exposure to crisis measure remains negative and significant across all
specifications. Thus, the previous findings are not driven by a shift in the asset structure of the
banking organization, that is, from foreign assets to domestic assets.
In the specifications shown in Tables 6 and 7 we test our second hypothesis. We want to
determine whether banks that are exposed to a banking crisis shock pull back less from those
countries where they have local offices. As noted in section I, we construct an indicator variable
equaling one if a bank has claims on residents of a host countries held at a local office (Indicator
if local presence). The coefficient on this indicator variable is positive and significant in the
specification shown in both tables (Table 7 excludes U.S. banks exposures to countries in the
first year of a banking crisis). Thus, the change in U.S. banks’ exposures to these countries is
larger on average. However, the interaction term between this indicator and the exposure to
crisis measure is not significant. This result implies that banks with a domestic presence in a
country do not necessarily cut their exposures by less to these countries when suffering a shock
elsewhere.
IV.
Conclusions
[To be completed]
7
References
Allen, Franklin and Douglas Gale. 2000. “Financial contagion”, Journal of Political Economy
108, 1-33.
Cerutti, Eugenio. 2013. “Drivers of cross-border banking exposures during the crisis”, IMF
Working Paper 13/9.
Cetorelli, Nicola and Linda Goldberg. 2012. “Liquidity management of U.S. Global Banks:
Internal Capital Markets in the Great Recession”, Journal of International Economics 88, 299311.
Heid, Frank, Thorsten Nestamann, Natalja Von Westernhagen, and Beatrice Weder. 2005.
“German bank lending during financial crises: A bank level analysis”, CEPR Discussion Paper
No. 5164.
Laeven, Luc and Fabian Valencia. 2012. “Systemic banking crises database: An update”, IMF
Working Paper 12/163.
Van Rijckeghem, Caroline and Beatrice Weder. 2003. “Spillovers through banking centers: a
panel data analysis of bank flows”, Journal of International Money and Finance 22, 483-509.
Rosengren, Eric. 2009. “Can we ensure that global banks do not create global problems?”
Speech given at the European Economics and Financial Centre, London, English, November 10,
2009.
Schnabl, Philipp. 2012. “Financial Globalization and the Transmission of Credit Supply Shocks:
Evidence from an Emerging Market”, The Journal of Finance 63, 897-932.
8
Table 1
Top ten countries by foreign claims
1980
Country
UNITED
1 KINGDOM
1995
% of
total
foreign
claims
Country
% of
total
foreign
claims
10.7
Country
UNITED
1 KINGDOM
10.6
2 JAPAN
11.5
2 JAPAN
11.5
1 JAPAN
UNITED
2 KINGDOM
3 GERMANY
6.6
3 GERMANY
7.5
3 GERMANY
8.9
4 BRAZIL
5.7
4 BRAZIL
5.5
4 CANADA
5.5
5 FRANCE
5.3
5 FRANCE
4.6
5 FRANCE
5.3
6 CANADA
4.9
6 AUSTRALIA
4.5
6 MEXICO
4.7
7 MEXICO
LUXEMBOU
8 RG*
4.6
7 ITALY
4
7 AUSTRALIA
4.1
3.4
8 CANADA
3.9
3.4
3.4
9 HONG KONG
1
0 KOREA
3.9
8 KOREA
NETHERLAN
9 DS
1
0 BRAZIL
9 ITALY
1
0 VENEZUELA
13.2
2010
% of
total
foreign
claims
2.8
% of total claims accounted for
by:
3.9
% of total claims accounted for
by:
16.0
3.4
3.2
% of total claims accounted for
by:
Top 5
countries
42.3
Top 5
countries
38.9
Top 5
countries
47.2
Top 10
countries
61.4
Top 10
countries
59.1
Top 10
countries
66.0
Total number of
countries
with claims
Total number of
countries
152
with claims
Total number of
countries
142
with claims
170
* Includes both Luxembourg and
Belgium.
Claims on an ultimate risk basis. The new reporters added to the FFCIEC Country Exposure Report in 2009
have been removed from the series.
9
Table 2
Summary Statistics
Variable
Exposure on an intermediate basis
Exposure on an ultimate risk basis
Net due to own related offices in other countries
Total Assets
Total equity capital
Total equity capital / Total assets
Net income
Loans and leases
Loans and leases / Total assets
Non-performing loans
Non-performing loans / Loans
Liquid assets
Liquid assets / Total assets
Liquid assets (Kashyap and Stein)
Liquid assets (Kashyap and Stein) / Total assets
* Amounts in millions.
10
Std.
Obs
Mean
Dev.
27564
0.68
3.58
27564
0.69
3.62
27564
0.08
3.25
27564
204000
445000
27564
15600
37300
27253
0.06
0.02
27564 1388.16 4058.48
27498
86900
176000
27367
0.54
0.15
18119 4058.33
10500
17832
0.03
0.02
17355
84800
184000
16746
0.19
0.14
17355
77600
145000
17085
0.23
0.12
Table 3
Dependent variable: Change in total claims to assets
Total claims on crisis countries/equity
(b)
-0.060***
[-2.800]
-0.005
[-0.561]
0.609**
[2.067]
0.033
[0.949]
0.287***
[3.707]
(c)
-0.083***
[-4.814]
(d)
-0.062***
[-3.496]
0.005
[0.616]
0.46
[1.544]
0.038
[1.185]
0.315***
[3.897]
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
33,708
256
32,389
250
33,708
256
32,389
250
28,625
253
27,564
249
29,652
238
28,608
231
Equity/assets
Loans/total assets
Herfindahl index of concentration of
claims across countries
No. of observations
No. of banks
Excluding data after
2005
(e)
(f)
-0.091***
-0.076**
[-2.893]
[-2.336]
0.007
[0.875]
0.457
[1.519]
0.065*
[1.886]
0.377***
[4.253]
(a)
-0.081***
[-3.875]
Log of total assets
Bank fixed effects
Country fixed effects
Year fixed effects
Country-year fixed effects
Excluding offshore financial
centers
(e)
(f)
-0.086***
-0.064***
[-4.224]
[-2.996]
0.007
[0.872]
0.526*
[1.682]
0.036
[1.174]
0.320***
[3.625]
11
Table 4
Dependent variable: Change in total claims to assets
Excluding countries that experienced a banking crisis (one year before and one year after)
Total claims on crisis countries/equity
(b)
-0.067***
[-2.641]
-0.011
[-1.260]
0.542*
[1.775]
0.063*
[1.759]
0.266***
[2.985]
(c)
-0.087***
[-3.540]
(d)
-0.066***
[-2.617]
-0.001
[-0.071]
0.41
[1.300]
0.067*
[1.888]
0.290***
[3.123]
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
28,053
253
27,016
249
28,053
253
27,016
249
24,563
252
23,672
248
25,205
235
24,360
230
Equity/assets
Loans/total assets
Herfindahl index of concentration of
claims across countries
No. of observations
No. of banks
Excluding data after
2005
(e)
(f)
-0.119***
-0.104***
[-3.580]
[-3.002]
0.003
[0.318]
0.445
[1.289]
0.087**
[2.228]
0.358***
[3.624]
(a)
-0.088***
[-3.492]
Log of total assets
Bank fixed effects
Country fixed effects
Year fixed effects
Country-year fixed effects
Excluding offshore
financial centers
(e)
(f)
-0.086***
-0.063**
[-3.254]
[-2.305]
0.002
[0.183]
0.401
[1.269]
0.065*
[1.884]
0.288***
[2.888]
12
Table 5
Dependent variable: Change in log of total claims
Total claims on crisis countries/equity
(b)
-0.186*
[-1.909]
-0.008
[-0.367]
0.71
[0.654]
0.064
[0.578]
0.439*
[1.681]
(c)
-0.213**
[-2.173]
(d)
-0.186*
[-1.908]
0.002
[0.074]
0.792
[0.713]
0.094
[0.914]
0.486**
[2.076]
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
33,362
268
31,960
258
33,362
268
31,960
258
28,700
267
27,546
258
29,359
250
28,223
239
Equity/assets
Loans/total assets
Herfindahl index of concentration of
claims across countries
No. of observations
No. of banks
Excluding data after
2005
(e)
(f)
-0.219***
-0.185**
[-2.912]
[-2.551]
-0.007
[-0.294]
1.525*
[1.850]
0.106
[1.011]
0.233
[1.605]
(a)
-0.209**
[-2.124]
Log of total assets
Bank fixed effects
Country fixed effects
Year fixed effects
Country-year fixed effects
Excluding offshore
financial centers
(e)
(f)
-0.202**
-0.171*
[-2.197]
[-1.857]
0
[0.017]
0.849
[0.841]
0.102
[0.975]
0.438*
[1.909]
13
Table 6
Dependent variable: Change in total claims to assets
Excluding
Offshore
financial
centers
Exposure to banking crises/equity
Log of total assets
Equity/assets
Loans/total assets
Concentration of claims (HHI)
Indicator if local presence
Indicator if local presence X Exposure to banking
crises/equity
Constant
Bank fixed effects
Country fixed effects
year fixed effects
Country-year fixed effects
Observations
R-squared
Robust t-statistics in parentheses
*** p<0.01, ** p<0.05, * p<0.1
14
Excluding
data after
2005
(1)
(2)
(3)
(4)
-0.066***
(-3.358)
-0.006
(-0.732)
0.608**
(2.083)
0.033
(0.943)
0.288***
(3.720)
0.012**
(2.092)
-0.060***
(-3.023)
0.004
(0.440)
0.454
(1.523)
0.038
(1.176)
0.315***
(3.898)
0.013**
(2.138)
-0.058**
(-2.526)
0.005
(0.640)
0.518
(1.640)
0.038
(1.202)
0.321***
(3.640)
0.017**
(2.365)
-0.059*
(-1.697)
0.005
(0.619)
0.462
(1.525)
0.065*
(1.861)
0.378***
(4.264)
0.018**
(2.439)
0.011
(0.486)
-0.124
(-0.722)
-0.006
(-0.276)
-0.173
(-1.168)
-0.015
(-0.620)
-0.200
(-1.376)
-0.040
(-1.092)
-0.182
(-1.376)
Yes
Yes
Yes
No
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
32,389
0.063
32,389
0.148
27,564
0.152
28,608
0.148
Table 7
Dependent variable: Change in total claims to
assets (excluding crisis observations)
Excluding
Offshore
financial
centers
Exposure to banking crises/equity
Log of total assets
Equity/assets
Loans/total assets
Concentration of claims (HHI)
Indicator if local presence
Indicator if local presence X Exposure to banking
crises/equity
Constant
Bank fixed effects
Country fixed effects
year fixed effects
Country-year fixed effects
Observations
R-squared
Robust t-statistics in parentheses
*** p<0.01, ** p<0.05, * p<0.1
15
Excluding
data after
2005
(1)
(2)
(3)
(4)
-0.086***
(-3.254)
-0.012
(-1.432)
0.551*
(1.817)
0.065*
(1.781)
0.268***
(3.017)
0.012*
(1.897)
-0.070**
(-2.455)
-0.002
(-0.231)
0.413
(1.313)
0.068*
(1.895)
0.291***
(3.137)
0.012
(1.648)
-0.064**
(-2.151)
-0.000
(-0.004)
0.405
(1.277)
0.067*
(1.913)
0.290***
(2.907)
0.014*
(1.736)
-0.096***
(-2.764)
0.001
(0.111)
0.450
(1.298)
0.087**
(2.220)
0.360***
(3.642)
0.015*
(1.811)
0.031
(1.208)
0.873***
(7.115)
0.005
(0.190)
-0.066
(-0.433)
0.001
(0.027)
-0.094
(-0.602)
-0.019
(-0.480)
-0.133
(-0.916)
Yes
Yes
Yes
No
Yes
No
No
Yes
Yes
No
No
Yes
Yes
No
No
Yes
27,016
0.065
27,016
0.141
23,672
0.144
24,360
0.141
Figure 1
Figure 2
Evolution of foreign claims as a fraction of bank assets
30%
20%
10%
Claims on an ultimate risk basis. Data aggregated across all reporters.
The new reporters added to the FFCIEC Country Exposure Report in 2009 have been
removed from the series.
16
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0%
1977
Foreign claims/total assets
40%
Figure 3
Geographic distribution of foreign claims
Percent of Total Foreign Claims
1
0.09
0.10
0.12
0.10
0.11
0.12
0.11
.8
0.22
0.22
0.15
0.17
0.15
0.14
0.14
.6
0.20
0.29
0.22
0.24
0.31
0.45
0.51
0.54
0.42
1990
1995
2000
2005
0.28
0.27
.4
.2
0.45
0.40
1980
1985
0.48
0
2010
Europe
Asia and Middle East
Latin America
Other
Figure 4
.4
10
.2
5
Number of banking crises
Exposure to banking crises/equity - Mean
17
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
1980
0
1978
Number of banking crises
15
Exposure to banking crises/equity
.6
20