Cross-Border Lending Contagion in Multinational Banks
AbstractWe study the interdependence of lending decisions in different country branches of a multinational bank. This is done both theoretically and empirically. First, we formulate a model of a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. Therefore, lending decisions are influenced by delegation and precautionary motives. We then show that these two phenomena create a separate channel of shock propagation, a function of bank shareholder and manager incentives. The workings of this channel can lead to either â€œcontagionâ€, meaning parallel reactions of the loan volumes in both countries to the parent bank home country disturbance, or standard â€œdiversificationâ€, when the reactions of a standard international portfolio optimizer within the two country units go in opposite directions. In particular, it can happen that the impact of an exogenous shock on credit has a different sign in the â€œrelationshipâ€ as opposed to the â€œarmâ€™s-lengthâ€ banking environment. Second, we construct a large sample of multinational banks and their branches/subsidiaries and look for the presence of lending contagion by panel regression methods. We obtain mixed results concerning contagion depending on the parent bank home country and the host economy of cross-border penetration. While the majority of multinational banks behave in line with the contagion effect, more than one-third do not. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2006/9.
Date of creation: Dec 2006
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Delegation; diversification; lending contagion; multinational bank; panel regression.;
Other versions of this item:
- Derviz, Alexis & Podpiera, Jirí, 2007. "Cross-border lending contagion in multinational banks," Working Paper Series 0807, European Central Bank.
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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