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The procyclicality of foreign bank lending: evidence from the global financial crisis

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  • Ugo Albertazzi

    ()
    (Bank of Italy)

  • Margherita Bottero

    ()
    (Bank of Italy)

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    Abstract

    We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 926.

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    Date of creation: Jul 2013
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    Handle: RePEc:bdi:wptemi:td_926_13

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    Related research

    Keywords: foreign banks; credit crunch; bank balance sheet channel; functional distance;

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    1. Ralph de Haas & Neeltje van Horen, 2011. "Running for the Exit: International Banks and Crisis Transmission," DNB Working Papers 279, Netherlands Central Bank, Research Department.
    2. Marcello Bofondi & Luisa Carpinelli & Enrico Sette, 2013. "Credit supply during a sovereign debt crisis," Temi di discussione (Economic working papers) 909, Bank of Italy, Economic Research and International Relations Area.
    3. Atif Mian & Asim Ijaz Khwaja, 2006. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," NBER Working Papers 12612, National Bureau of Economic Research, Inc.
    4. Luigi Infante & Paola Rossi, 2009. "The retail activity of foreign banks in Italy: effects on credit supply to households and firms," Temi di discussione (Economic working papers) 714, Bank of Italy, Economic Research and International Relations Area.
    5. Joe Peek & Eric S. Rosengren, 1996. "The international transmission of financial shocks: the case of Japan," Working Papers 96-1, Federal Reserve Bank of Boston.
    6. Claudio Borio & Robert McCauley & Patrick McGuire, 2011. "Global credit and domestic credit booms," BIS Quarterly Review, Bank for International Settlements, September.
    7. Stijn Claessens & Neeltje Horen, 2014. "Foreign Banks: Trends and Impact," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 295-326, 02.
    8. Nicola Cetorelli & Linda S. Goldberg, 2010. "Global banks and international shock transmission: evidence from the crisis," Staff Reports 446, Federal Reserve Bank of New York.
    9. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
    10. Pietro Alessandrini & Manuela Croci & Alberto Zazzaro, 2005. "The geography of banking power: role of function distance," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 58(235), pages 129-167.
    11. Allen, Franklin & Hryckiewicz, Aneta & Kowalewski, Oskar & Tumer-Alkan, Gunseli, 2010. "Transmission of Bank Liquidity Shocks in Loan and Deposit Markets: The Role of Interbank Borrowing and Market Monitoring," Working Papers 10-28, University of Pennsylvania, Wharton School, Weiss Center.
    12. Fabio Panetta & Paolo Angelini & Ugo Albertazzi & Francesco Columba & Wanda Cornacchia & Antonio Di Cesare & Andrea Pilati & Carmelo Salleo & Giovanni Santini, 2009. "Financial sector pro-cyclicality: lessons from the crisis," Questioni di Economia e Finanza (Occasional Papers) 44, Bank of Italy, Economic Research and International Relations Area.
    13. Altman, Edward I. & Marco, Giancarlo & Varetto, Franco, 1994. "Corporate distress diagnosis: Comparisons using linear discriminant analysis and neural networks (the Italian experience)," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 505-529, May.
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