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Cross-Border Lending Contagion in Multinational Banks

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  • Alexis Derviz
  • Jiri Podpiera

Abstract

We 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 “contagionâ€, meaning parallel reactions of the loan volumes in both countries to the parent bank home country disturbance, or standard “diversificationâ€, 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 “relationship†as opposed to the “arm’s-length†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 Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2006/9.

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Date of creation: Dec 2006
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Handle: RePEc:cnb:wpaper:2006/9

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Keywords: Delegation; diversification; lending contagion; multinational bank; panel regression.;

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References

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  1. R.T.A. de Haas & I.P.P. van Lelyveld, 2003. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," DNB Staff Reports (discontinued) 91, Netherlands Central Bank.
  2. Calzolari, Giacomo & Lóránth, Gyöngyi, 2004. "Regulation of Multinational banks: A Theoretical Inquiry," CEPR Discussion Papers 4232, C.E.P.R. Discussion Papers.
  3. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  4. Chan-Lau, Jorge A & Chen, Zhaohui, 2002. "A Theoretical Model of Financial Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 53-63, February.
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Cited by:
  1. Bang Nam Jeon & Maria Pia Olivero & Ji Wu, 2013. "Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries," Working Papers 052013, Hong Kong Institute for Monetary Research.
  2. Jeon, Bang & Olivero, María & Wu, Ji, 2012. "Multinational Banking and the International Transmission of Financial Shocks: Evidence from Foreign Bank Subsidiaries," School of Economics Working Paper Series 2012-2, LeBow College of Business, Drexel University.
  3. Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi, 2010. "Multinational Banking in Europe: Financial Stability and Regulatory Implications;Lessons from the Financial Crisis," Mo.Fi.R. Working Papers 40, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Sophie Brana & Delphine Lahet, 2011. "Foreign Banks and the Stability of Foreign and Domestic Credit in CEECs," Larefi Working Papers 1107, Larefi, Université Bordeaux 4.
  5. Derviz, Alexis, 2013. "Bubbles, bank credit and macroprudential policies," Working Paper Series 1551, European Central Bank.
  6. Michael Boss & Martin Fenz & Johannes Pann & Claus Puhr & Martin Schneider & Eva Ubl, 2009. "Modeling Credit Risk through the Austrian Business Cycle: An Update of the OeNB Model," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 17.
  7. Alexis Derviz & Marie Raková, 2012. "Parent Influence on Loan Pricing by Czech Banks," Prague Economic Papers, University of Economics, Prague, vol. 2012(4), pages 434-499.
  8. Alexis Derviz & Marie Rakova, 2009. "Funding Costs and Loan Pricing by Multinational Bank Affiliates," Working Papers 2009/9, Czech National Bank, Research Department.
  9. repec:prg:jnlpep:v:2013:y:2013:i:4:id:433:p:434-499 is not listed on IDEAS
  10. repec:laf:wpaper:201107 is not listed on IDEAS

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