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The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets

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  • Kulwant Rai
  • Herman Kamil
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    Abstract

    The recent global financial turmoil raised questions about the stability of foreign banks'' financing to emerging market countries. While foreign banks'' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks'' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks'' lending was channeled in domestic currency. We also show that foreign banks'' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks'' lending.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/102.

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    Length: 33
    Date of creation: 01 Apr 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/102

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    Related research

    Keywords: Banks; Bank credit; Credit restraint; Economic models; Emerging markets; International banking; Latin America; Liquidity; foreign banks; foreign bank; international settlements; foreign currency; foreign affiliates; host countries; host country; foreign competition; foreign currencies; financial stability; financial sector; foreign capital; international lending; medium-sized firms; financial services; macroeconomic stability; increased competition; financial institutions; enhanced competition; foreign operations; domestic banks; credit markets;

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    Cited by:
    1. Clarke, George R.G. & Cull, Robert & Kisunko, Gregory, 2012. "External finance and firm survival in the aftermath of the crisis: Evidence from Eastern Europe and Central Asia," Journal of Comparative Economics, Elsevier, vol. 40(3), pages 372-392.
    2. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2013. "Multinational banking and the international transmission of financial shocks: Evidence from foreign bank subsidiaries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 952-972.
    3. Cull, Robert & Martínez Pería, María Soledad, 2013. "Bank ownership and lending patterns during the 2008–2009 financial crisis: Evidence from Latin America and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4861-4878.
    4. Victor Pontines & Reza Y. Siregar, 2012. "How Should We Bank With Foreigners? An Empirical Assessment of Lending Behaviour of International Banks to Six East Asian Economies," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ54, June.
    5. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.
    6. Nicola Cetorelli & Linda S. Goldberg, 2011. "Liquidity Management of U.S. Global Banks: Internal Capital Markets in the Great Recession," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
    7. Siregar, Reza & Wihardja, Monica, 2013. "Fragile Balance of Payment in Indonesia in the Midst of Recent Global Economic Uncertainties," MPRA Paper 49027, University Library of Munich, Germany.
    8. Imran, Kashif & Nishat, Mohammed, 2013. "Determinants of bank credit in Pakistan: A supply side approach," Economic Modelling, Elsevier, vol. 35(C), pages 384-390.
    9. Eugenio Cerutti & Patrick M. McGuire & Stijn Claessens, 2011. "Systemic Risks in Global Banking," IMF Working Papers 11/222, International Monetary Fund.

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