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The internationalization of domestic banks and the credit channel: an empirical assessment

Author

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  • Paola Morales
  • Daniel Osorio
  • Juan Sebastian Lemus-Esquivel

Abstract

This paper analyses the extent to which the strength of the credit channel is affected by the expansion of domestic banks abroad, widely considered the most important structural change of Colombia banking system in recent years. Using loan-level quarterly data for the period between 2007 and 2016, we estimate panel specifications that relate changes in the loan amount and the loan interest rates to variations on the domestic policy rate, the number of foreign subordinates of the lender bank and the interaction between the two. The results suggest that the response of international banks (i.e., those that have significantly expanded abroad) in the face of changes to the domestic policy rate is not statistically different to that of purely local banks, while the cost of credit is found to be slightly higher. Even though in principle this could be interpreted to the effect that internationalization has had no significant effect on the potency of the credit channel, the results tend towards a more subtle conclusion. Specifically, in the face of increases in the domestic policy rate, international banks tend to switch more strongly from domestic to foreign sources of funding. Purely local banks are able thus to capture relatively more domestic funding under these conditions, which allows their credit activity to respond to monetary policy on a similar scale to that of international banks. This result supports the idea that banks switch funding activities between their operating jurisdictions depending on monetary policy conditions, and that the internationalization of domestic banks plays a cushioning role for the economy at times when the monetary policy stance changes significantly.

Suggested Citation

  • Paola Morales & Daniel Osorio & Juan Sebastian Lemus-Esquivel, 2019. "The internationalization of domestic banks and the credit channel: an empirical assessment," BIS Working Papers 801, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:801
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    Citations

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    Cited by:

    1. Carlos CantĂș & Leonardo Gambacorta, 2019. "How do bank-specific characteristics affect lending? New evidence based on credit registry data from Latin America," BIS Working Papers 798, Bank for International Settlements.

    More about this item

    Keywords

    bank-lending channel; internationalization of banks; banks' business models; branches and subsidiaries;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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