Spillovers and Relationships in Cross-Border Banking: The Case of Chile

This paper assesses the spillovers from the global financial crisis on the cost and structure of crossborder funding of Chilean banks. To do so it uses a novel dataset of individual debt transactions between Chilean banks and their foreign counterparties between 2008 and 2016. We find that global banks that experienced the largest hike in their funding costs charged the highest spreads to Chilean banks in this period. We also find that after the financial crisis of 2008 and 2009 the Chilean banking system underwent a significant shift in its sources of funding, with a larger reliance on bond issuance and a shift to new bank counterparties. We find evidence that distance matters for the cost of crossborder borrowing, as well as the intensity and age of banking relationships. Hence, shifting sources of funding is a costly process, but over time as banking relationships develop with new counterparties, the cost of this shift decreases.