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

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  • Galina Hale
  • Tumer Kapan
  • Camelia Minoiu

Abstract

We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

Suggested Citation

  • Galina Hale & Tumer Kapan & Camelia Minoiu, 2019. "Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects," Finance and Economics Discussion Series 2019-052, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2019-52
    DOI: 10.17016/FEDS.2019.052
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    File URL: https://www.federalreserve.gov/econres/feds/files/2019052pap.pdf
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    More about this item

    Keywords

    cross-border interbank exposures; banking crises; shock transmission; bank loans; real economy;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • F6 - International Economics - - Economic Impacts of Globalization
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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