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The Domestic Credit Supply Response to International Bank Deleveraging

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  • Shekhar Aiyar
  • Sonali Jain-Chandra

Abstract

During the global financial crisis, European banks contracted foreign claims on recipient economies sharply. This paper examines the impact of that deleveraging on credit supply in recipient economies, with a particular focus on Asia. Identification is achieved by exploiting heterogeneity in ex-ante patterns of funding reliance on different European banking systems, and in variation in the ratio of local claims in local currency to total foreign claims in recipient economies. These sources of variation are used to create instruments for the deleveraging shock. We find that the contraction in European bank foreign claims was associated with a substantial reduction in domestic credit supply in a broad sample of countries. However, the credit supply response in Asia was only about half the size of the response in non-Asian countries, possibly due to a more robust policy response and healthier local bank balance sheets at the outset of the crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/258.

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Length: 15
Date of creation: 26 Oct 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/258

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Related research

Keywords: Bank credit; Asia; Europe; Demand; Supply; International banks; Fiscal policy; claims; banking; bank lending; bank for international settlements; bank balance sheets; banking systems; bank liquidity; bank claims; capital adequacy; banking statistics; bank funding; deposit insurance; foreign exchange; bank loan; bank of england; bank capital; bank of international settlements; banking crisis; bank loans; bank of international settlements (bis);

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  1. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking Globalization, Monetary Transmission, and the Lending Channel," NBER Working Papers 14101, National Bureau of Economic Research, Inc.
  2. Aiyar, Shekhar, 2011. "How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom," Bank of England working papers 424, Bank of England.
  3. Shekhar Aiyar, 2012. "From Financial Crisis to Great Recession: The Role of Globalized Banks," American Economic Review, American Economic Association, vol. 102(3), pages 225-30, May.
  4. Ralph De Haas & Neeltje Van Horen, 2012. "International Shock Transmission after the Lehman Brothers Collapse: Evidence from Syndicated Lending," American Economic Review, American Economic Association, vol. 102(3), pages 231-37, May.
  5. Giannetti, Mariassunta & Laeven, Luc, 2012. "The flight home effect: Evidence from the syndicated loan market during financial crises," Journal of Financial Economics, Elsevier, vol. 104(1), pages 23-43.
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