Global Banks and International Shock Transmission: Evidence from the Crisis

Global banks played a significant role in the transmission of the 2007 to 2009 crisis to emerging market economies. This paper examines the relationships between adverse liquidity shocks on main developed-country banking systems to emerging markets across Europe, Asia, and Latin America, isolating loan supply from loan demand effects. Loan supply in emerging markets was significantly affected through three separate channels: a contraction in direct, cross-border lending by foreign banks; a contraction in local lending by foreign banks’ affiliates in emerging markets; and a contraction in loan supply by domestic banks resulting from the funding shock to their balance sheet induced by the decline in interbank, cross-border lending. Policy interventions, such as the Vienna Initiative introduced in Europe, influenced the lending channel effects on emerging markets of head office balance sheet shocks. Moreover, openness to international funding was not the main vehicle of propagation. Rather, it was exposure to international funding from source country banking systems that were ex ante more likely to suffer from the liquidity shock.