Cross-Border Lending Contagion in Multinational Banks
We study the interdependence of lending decisions in different country branches of a multinational bank. This is done both theoretically and empirically. First, we formulate a model of a bank that delegates the management of its foreign unit to a local manager with non-transferable skills. The bank differs from other international investors due to a liquidity threshold which induces a depositor run and a regulatory action if attained. Therefore, lending decisions are influenced by delegation and precautionary motives. We then show that these two phenomena create a separate channel of shock propagation, a function of bank shareholder and manager incentives. The workings of this channel can lead to either â€œcontagionâ€, meaning parallel reactions of the loan volumes in both countries to the parent bank home country disturbance, or standard â€œdiversificationâ€, when the reactions of a standard international portfolio optimizer within the two country units go in opposite directions. In particular, it can happen that the impact of an exogenous shock on credit has a different sign in the â€œrelationshipâ€ as opposed to the â€œarmâ€™s-lengthâ€ banking environment. Second, we construct a large sample of multinational banks and their branches/subsidiaries and look for the presence of lending contagion by panel regression methods. We obtain mixed results concerning contagion depending on the parent bank home country and the host economy of cross-border penetration. While the majority of multinational banks behave in line with the contagion effect, more than one-third do not. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries.
|Date of creation:||Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calzolari, Giacomo & Lóránth, Gyöngyi, 2004.
"Regulation of Multinational banks: A Theoretical Inquiry,"
CEPR Discussion Papers
4232, C.E.P.R. Discussion Papers.
- Calzolari, Giacomo & Loranth, Gyongyi, 2011. "Regulation of multinational banks: A theoretical inquiry," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 178-198, April.
- Calzolari, Giacomo & Loranth, Gyongyi, 2005. "Regulation of multinational banks: a theoretical inquiry," Working Paper Series 0431, European Central Bank.
- Douglas W. Diamond & Raghuram G. Rajan, 1999.
"A Theory of Bank Capital,"
NBER Working Papers
7431, National Bureau of Economic Research, Inc.
- Ralph de Haas & Iman van Lelyveld, 2002.
"Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe,"
- R. T.A. de Haas & I. P.P van Lelyveld, 2004. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(2), pages 125-151, August.
- R.T.A. de Haas & I.P.P. van Lelyveld, 2003. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," DNB Staff Reports (discontinued) 91, Netherlands Central Bank.
- Chan-Lau, Jorge A & Chen, Zhaohui, 2002. "A Theoretical Model of Financial Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 53-63, February.
When requesting a correction, please mention this item's handle: RePEc:cnb:wpaper:2006/9. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)
If references are entirely missing, you can add them using this form.