Real domestic effects of banks’ cross-border lending

In this paper we investigate empirically whether having a domestic banking sector that lends more abroad is beneficial for the productivity of the domestic real economy. We investigate this question by using both cross-country/cross-sector and within-country/cross-firm panel data, thus providing aggregate and micro evidence. The analysis, that comprises the estimation of several OLS, system GMM, local projection and IV models, points to the beneficial role of a higher internationalisation of the domestic banking system on the productivity of the domestic economy. Results emerge both when using cross-country/cross-sector data from a panel of European economies, and when adopting a more granular approach by using UK firm and bank panel data. This effect is stronger when the domestic banking system lends more to firms in foreign advanced economies, is not limited to exporting firms, and is more pronounced during the early phase of a new banking relationship. In contrast, the inflow of lending from foreign banks does not result in productivity improvements for the domestic real economy.