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Cross-border lending contagion in multinational banks

  • Derviz, Alexis
  • Podpiera, Jirí

We study both theoretically and empirically the inter- dependence of lending decisions in different country branches of a multinational bank. First, we model 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. A separate channel of shock propagation exists since lending decisions are influenced by delegation and precautionary motives. This can entail “contagion”, i.e. parallel reactions of the loan volumes in both countries to the parent bank home country disturbance. Second, we look for the presence of lending contagion by panel regression methods in a large sample of multinational banks and their affiliates. We find that the majority of multinational banks behave in line with contagion effect. In addition, the presence of contagion seems to be related to the geographical location of subsidiaries. JEL Classification: F37, G21, G28, G31

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Paper provided by European Central Bank in its series Working Paper Series with number 0807.

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Date of creation: Sep 2007
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Handle: RePEc:ecb:ecbwps:20070807
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  1. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  2. Calzolari, Giacomo & Lóránth, Gyöngyi, 2004. "Regulation of Multinational banks: A Theoretical Inquiry," CEPR Discussion Papers 4232, C.E.P.R. Discussion Papers.
  3. Ralph de Haas & Iman van Lelyveld, 2002. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," International Finance 0209002, EconWPA.
  4. 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.
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