Global Banks and International
Shock Transmission:
Evidence from The Crisis
Nicola Cetorelli
Linda Goldberg
Federal Reserve Bank NY
Federal Reserve Bank NY
NBER
The views expressed in this paper are those of the individual authors and do not
necessarily reflect the position of the Federal Reserve Bank of New York or the
Federal Reserve System.
1
Capital flows to emerging markets plummeted
during the crisis
USDbn
Private Capital Flows to Emerging Markets
By Region
USDbn
500
500
Emerging Asia
Emerging
Europe
400
400
300
300
200
200
100
100
Latin America
0
0
-100
-100
1998
2000
2002
2004
2006
2008
A collapse of bank loans to emerging markets
dominated the drop in capital flows
Private Capital Flows to Emerging Markets
USDbn
USDbn
550
550
FDI
Bank Loans
450
450
350
350
250
250
150
150
50
-50
-150
1998
50
Net Debt Securities
-50
Portf olio Equity
-150
2000
2002
2004
2006
2008
Channels of international transmission
through global banks
Large global bank
Domestic parent
balance sheet
Liquid assets
Deposits
Loans
Other Funds
Domestic loans
External borrowing
Cross-border loans
Large build up of $
(long-term) assets
financed with shortterm $ funding.
Capital
4
Channels of international transmission
through global banks
Large global bank
Domestic parent
balance sheet
Foreign affiliate
balance sheet
Liquid assets
Deposits
Foreign liquid Deposits
assets
Loans
Other Funds
Loans
Domestic loans
External borrowing
Foreign local loans
Cross-border loans
Internal borrowing
Internal lending
Capital
Other Funds
Capital
5
Channels of international transmission vary
by type of bank
Domestic bank in EM country
Liquid assets
Deposits
Loans
Other funds
International interbank funds
(cross-border borrowing)
Capital
6
A collapse of bank loans to emerging markets
dominated the drop in capital flows
Private Capital Flows to Emerging Markets
USDbn
USDbn
550
550
FDI
Bank Loans
450
450
350
350
250
250
150
150
50
-50
-150
1998
50
Net Debt Securities
-50
Portf olio Equity
-150
2000
2002
2004
2006
2008
Identification challenges


Not all suppliers of fund hit the same way by
shock. Lending drop should be especially
strong for those ex ante more exposed to $
funding shock
Lending supply or lending demand?
8
Identification challenges

Data: BIS international banking statistics.
For each BIS reporting country, data on international
claims vis-à-vis EM countries.
17 source countries to 94 EM countries.
Both cross-border lending and local lending.

IMF data on domestic lending in EM
countries.
9
Identification challenges


Need measure of ex-ante exposure to $
funding risk.
Built with confidential BIS data on $ assets
and liabilities of banks in each source
country. Used data up to 2007q2.
Lij  0  1  (Ex ante $ vulnerability)i  ij
10
Lij  0  1  (Ex ante $ vulnerability)i  ij


Still problem of demand simultaneity.
OLS estimate likely to be biased
Lij  0  1  (Ex ante $ vulnerability)i  j  ij

Unobservable demand component
11

Use Fixed Effect specification:
Lij  1  (Ex ante $ vulnerability)i  FE j  ij

Identification from the comparison of lending
growth to the same EM country by banks
from different source countries.

Identification strategy as in Kwhaja and Mian
(AER 2008)
12



While OLS estimates are biased, they can be
used to extract information on loan demand
shocks.
Turns out useful to evaluate significance of third
channel (changes in lending supply by domestic
banks)
From OLS-FE estimations on local lending of
source country banks we can gauge importance
of the demand bias
13
Number of Emerging Market Countries (of 94) in BIS
Reporting Country Lending
Source Country
United States
Japan
Australia
Belgium
Canada
Switzerland
Germany
Denmark
Spain
France
Great Britain
Ireland
Sweden
Portugal
Netherlands
Luxembourg
Italy
International Claims (Cross-Border)
Local Claims in Local Currency
Pre Crisis
2006Q3-2007q2
72
50
33
72
63
80
82
59
70
86
86
46
64
52
79
37
66
Pre Crisis
2006Q3-2007q2
41
15
1
11
21
23
19
13
16
34
37
2
6
5
29
0
20
Post Crisis
2008q3-2009q2
76
47
32
71
65
79
81
58
67
82
86
43
63
49
78
38
72
Post Crisis
2008q3-2009q2
42
15
3
14
22
23
23
1
17
43
35
1
7
5
29
0
19
Bank Lending to Emerging Markets
Fixed Effects Regressions
Cross-Border
Local Claims
(1)
(2)
(3)
(4)
-0.316**
-0.380***
-0.271*
-0.269
--
-0.037
--
-0.927**
--
-0.309
--
3.070***
# obs.
1029
1029
245
245
R2
0.250
0.253
0.397
0.421
Vulnerability
Vienna
Initiative
Countries
Vulnerability ·
Vienna
Fixed effect coefficients not reported. *** p < 0.01, ** p < 0.05, * p < 0.10
Bank Lending to Emerging Markets
Fixed Effects Regressions
Cross-Border
Local Claims
(1)
(2)
(3)
(4)
-0.316**
-0.380***
-0.271*
-0.269
--
-0.037
--
-0.927**
--
-0.309
--
3.070***
# obs.
1029
1029
245
245
R2
0.250
0.253
0.397
0.421
Vulnerability
Vienna
Initiative
Countries
Vulnerability ·
Vienna
Fixed effect coefficients not reported. *** p < 0.01, ** p < 0.05, * p < 0.10
Loan Supply Contractions from Source to EM
Destinations
Cross Border Lending
Germany
(low vulnerability)
Spain
(mid vulnerability)
United Kingdom
(high vulnerability)
Local Lending
Pre-Crisis
Bilateral
Quarterly
Average
($ millions)
Post-Pre %
Change
Pre-Crisis
Bilateral
Quarterly
Average
($ millions)
Post-Pre %
Change
9,233
-8.02%
5,136
-6.88%
1,454
-18.26 %
14,417
-15.66%
3,644
-28.44%
8,547
-24.39%
Channels of international transmission vary by
type of bank
Domestic bank in EM country
Liquid assets
Deposits
Loans
Other funds
International interbank funds
(cross-border borrowing)
Capital
18
Domestic Lending Supply Growth Shock
VARIABLES
High V2 share in
cross border (H)
Cross border
share in funding (X)
(H)·(X)
Constant
Observations
R-squared
(1)
(2)
(3)
(4)
0.431*
(0.243)
-0.348**
(0.135)
0.311
(0.238)
0.654***
(0.093)
0.370***
(0.044)
0.610***
(0.098)
-0.453***
(0.160)
-0.174
(0.467)
0.818
(0.678)
0.677***
(0.112)
58
0.118
58
0.050
58
0.145
58
0.167
-0.370***
(0.135)
The dependent variable is a measure of domestic bank lending growth pre-post crisis for each emerging market country. Lending in
the “pre” crisis period is defined as the time average between 2006q2 and 2007q2. Lending in the “post” crisis period is defined as the
time average between 2008q3 and 2009q2. Share of cross-border lending is the ratio of total cross-border lending in a country to total
domestic lending. High V2 share in cross border is the share of cross border funding obtained from source countries with V2 values
above the median value across source countries. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 .
Takeaways
• Significant Drop in Lending Supply to Emerging
Markets
• Shock transmitted both directly - cross-border
lending channel - and indirectly - through
internal capital markets channel of banks
managing liquidity globally.
• Economic magnitude of transmission channels
is large.
Takeaways
• Policy interventions to support balance sheet of
developed countries’ banks (Vienna Initiative)
alleviated local claims transmission.
• Evidence for third channel as well: domestic EM
banks especially reliant on cross-border funding
from ex-ante highly vulnerable banks were most
affected.
• General “openness” not a factor.
22
Gross ST US dollar funding risks*
international claims
* Liabilities to official monetary authorities + International liabilities
to non-banks + Local liabilities to US residents booked by US
offices + Net Liabilities to banks + cross-currency FX swap (if
negative)
Germany
Spain
United
Kingdom
$ billion
865
247
1,524
% intl. claims
(25.4)
(57.8)
(90.0)
Ex ante dollar vulnerability (McGuire and
Von Peter, 2009)





Proxies of dollar funding risk:
Ideally one would want measure of maturity mismatch.
Data allows to construct upper bounds.
V1: OMA_L+ NB_L + OTH B_L + FX SWAPS (if negative)
V2: OMA_L+ NB_L + NET OTH B_L + FX SWAPS (if negative)
V3:



OMA_L+ NB_L (if negative) + NET OTH B_L + FX SWAPS (if negative)
OMA_L+ NET OTH B_L + FX SWAPS (if negative)
We scale each measure by total international country
claims.
24
Low ex ante
vulnerability
High ex ante
vulnerabillity
Belgium
Germany
Denmark
Finland
Ireland
Italy
Luxembourg
Portugal
Sweden
Australia
Canada
Switzerland
Spain
France
Great Britain
Japan
Netherlands
United States
25
Identification of Transmission via Loan Supply
1
Lij  0  1  (Ex ante $ vulnerability)i  j  ij
•  measured pre- versus post- crisis
• Use measure of ex ante dollar vulnerability to pick up
relative size of source country/bank funding shock
• Larger funding shock associated with larger lending  ,
whether defined over cross-border loans or local claims.
• But, OLS regression (1) is biased due to unobservable
demand component, j.
26
Identification of Transmission via Loan Supply
 2
Lij  1 Di   j  FE j  ij
Solution: obtain identification of loan supply effect by
comparing lending by banks hit differently by the shock
but lending to the same country
• any change in demand should be common across
lenders, and would not affect the comparison.
The FE specification in (2) captures the j specific demand
shock with the vector of FE variables FEj.
 coefficients compare lending between banks hit
severely and banks not hit severely to the same country.
27
Additional econometric observations

While OLS estimates are biased, they can be used
[with (2)] to extract information on loan demand
shocks.



By construction, the residuals from the OLS regressions from
(1) should reflect a noise component plus the idiosyncratic
demand component for each country of destination.
The residuals from the corresponding fixed effect estimation
should only reflect the noise component.
In conjunction with data on lending by domesticallyowned banks by country, we isolate loan supply effects
from these effects for comparison with loan supply  by
foreign owned banks.
28
Table 4. Summary statistics
Variable
Obs
Mean
Std. Dev.
Min
Max
Pre-post cross-border lending growth
To EM Europe
To EM Latin America
To EM Asia
390
129
128
130
0.230
0.385
0.221
0.089
0.663
0.714
0.630
0.620
-2.376
-1.507
-2.376
-1.545
2.943
2.943
2.327
2.278
Pre-post local lending growth
To EM Europe
To EM Latin America
To EM Asia
185
66
54
65
0.331
0.559
0.208
0.201
0.866
0.674
0.845
1.010
-6.788
-0.766
-2.100
-6.788
3.379
3.206
3.379
1.244
Pre-post domestic lending growth
22
0.427
0.218
-0.021
0.811
Ex-ante dollar vulnerability
Correlations
V1
V2 0.992
V3 0.701 0.710
18
18
18
0.780
0.611
0.208
0.492
0.434
0.201
0.064
0.051
0.009
1.674
1.455
0.831
29
Cross-border lending growth to emerging markets
VARIABLES
V1
(1)
OLS
Observations
R-squared
(3)
OLS
-0.185***
(0.0685)
Di V2
proxy
V3
Constant
(2)
OLS
(4)
FE
(5)
FE
(6)
FE
-0.176***
(0.0659)
-0.222***
(0.0777)
-0.211***
(0.0747)
0.373***
(0.0626)
0.365***
(0.0577)
-0.263
(0.182)
0.282***
(0.0493)
390
0.018
390
0.021
390
0.005
-0.218
(0.176)
390
0.239
390
0.241
390
0.228
30
Local claims lending growth to emerging markets
VARIABLES
V1
Di
proxy
(1)
OLS
(2)
OLS
(3)
OLS
-0.248*
(0.133)
V2
(4)
FE
(5)
FE
(6)
FE
-0.198
(0.134)
-0.314**
-0.261*
(0.152)
(0.154)
V3
Constant
0.555***
(0.136)
0.556***
(0.126)
-1.074**
(0.431)
0.530***
(0.102)
Observations
R-squared
185
0.019
185
0.023
185
0.033
-0.984**
(0.427)
185
0.310
185
0.313
185
0.323
31
Cross-border lending pre and post crisis
By ex ante high or low vulneraibility
0.6
0.4
Average Log Lending
0.2
0
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Low vulnerability
High vulnerability
-0.2
-0.4
-0.6
-0.8
32
Local lending pre and post crisis
By ex ante high or low vulneraibility
0.6
0.4
0.2
Average Log Lending
0
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
-0.2
Low vulnerability
High vulnerability
-0.4
-0.6
-0.8
-1
-1.2
33
Regional differences and the Vienna initiative
VARIABLES
V2
V2 ∙ Latin America
V2 ∙ Asia
Latin America
Asia
Constant
Regional differences
Cross-border lending Local lending
(OLS)
(OLS)
-0.509***
(0.134)
0.362*
(0.189)
0.505***
(0.185)
-0.377***
(0.139)
-0.596***
(0.138)
0.686***
(0.0971)
-0.339
(0.278)
0.272
(0.390)
0.0395
(0.378)
-0.501
(0.311)
-0.323
(0.301)
0.761***
(0.196)
Vienna countries
V2 ∙ Vienna
Observations
R-squared
390
0.072
185
0.054
Vienna initiative
Cross-border lending Local lending
(FE)
(FE)
-0.262***
(0.0813)
-0.408**
(0.193)
-0.268
(0.254)
0.461
(0.742)
-1.317***
(0.468)
3.573***
(1.285)
390
0.247
185
0.346
34
Domestic Lending Pre and Post Crisis
By high or low X-Border exposure to dollar vulnerable countries
0.6
Average Log Lending
0.4
Low exposure to
highly vulnerable
countries
0.2
0
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
High exposure to
highly vulnerable
countries
-0.2
-0.4
2007q2
2008q3
-0.6
35
Domestic bank lending growth in emerging markets
VARIABLES
V2
(1)
(2)
(3)
(4)
(5)
(6)
Raw data Corrected data Raw data Corrected data Raw data Corrected data
-0.161*
(0.0885)
-0.0656
(0.144)
Share of crossborder lending
Constant
Observations
R-squared
-0.145*
(0.0851)
-0.0573
(0.148)
0.229*
(0.126)
0.119
(0.204)
0.207*
(0.121)
0.110
(0.210)
0.508***
(0.0626)
0.462***
(0.102)
0.328***
(0.0705)
0.377***
(0.114)
0.410***
(0.0828)
0.409**
(0.144)
22
0.142
22
0.010
22
0.141
22
0.017
22
0.256
22
0.024
36
Table 3
Growth and Decline in Lending, percent change by source and destination
Emerging Europe Emerging Asia
Latin America
2006Q3 2008Q3 2006Q3 2008Q3 2006Q3 2008Q3
2007Q2 2009Q2 2007Q2 2009Q2 2007Q2 2009Q2
Source Region
Type of
claim
North America
International
49.3
10.6
30.3
40.6
13.5
21.8
Local
36.1
-4.5
21.8
6.5
18.4
-0.5
International
52.0
-9.8
27.0
-21.5
18.4
-15.6
Local
55.1
-10.6
55.1
-9.6
31.6
-4.1
International
29.1
-16.1
21.1
-8.2
28.1
-3.3
113.9
-39.7
12.7
-6.2
7.3
-15.6
32.1
-21.3
16.2
14.6
25.0
-13.5
Europe
Asia
Local
Domestic Banks Lending
37