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Shock Transmission through Cross-Border Bank Lending: Credit and Real Effect

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  • Galina Hale
  • Tumer Kapan
  • Camelia Minoiu

Abstract

We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks? profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks? supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.

Suggested Citation

  • Galina Hale & Tumer Kapan & Camelia Minoiu, 2016. "Shock Transmission through Cross-Border Bank Lending: Credit and Real Effect," Working Paper Series 2016-1, Federal Reserve Bank of San Francisco, revised 04 Feb 2016.
  • Handle: RePEc:fip:fedfwp:2016-01
    DOI: 10.24148/wp2016-01
    Note: This is a significantly revised version of a paper previously titled "Crisis transmission in the global banking network" (IMF Working Paper No. 16/91).
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    Cited by:

    1. Georgiadis, Georgios & Jančoková, Martina, 2017. "Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks," Working Paper Series 2082, European Central Bank.
    2. Steven Poelhekke, 2016. "Financial globalization and foreign direct investment," DNB Working Papers 527, Netherlands Central Bank, Research Department.
    3. Marc Hofstetter & Jose Ignacio Lopez & Miguel Urrutia, 2018. "Limits to Foreign Exchange Net Open Positions and Capital Requirements in Emerging Economies," Documentos CEDE 015995, Universidad de los Andes - CEDE.
    4. Abbassi, Puriya & Brownlees, Christian & Hans, Christina & Podlich, Natalia, 2017. "Credit risk interconnectedness: What does the market really know?," Journal of Financial Stability, Elsevier, vol. 29(C), pages 1-12.

    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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