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The Domestic Credit Supply Response to International Bank Deleveraging; Is Asia Different?

Author

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  • Shekhar Aiyar
  • Sonali Jain-Chandra

Abstract

During the global financial crisis, European banks contracted foreign claims on recipient economies sharply. This paper examines the impact of that deleveraging on credit supply in recipient economies, with a particular focus on Asia. Identification is achieved by exploiting heterogeneity in ex-ante patterns of funding reliance on different European banking systems, and in variation in the ratio of local claims in local currency to total foreign claims in recipient economies. These sources of variation are used to create instruments for the deleveraging shock. We find that the contraction in European bank foreign claims was associated with a substantial reduction in domestic credit supply in a broad sample of countries. However, the credit supply response in Asia was only about half the size of the response in non-Asian countries, possibly due to a more robust policy response and healthier local bank balance sheets at the outset of the crisis.

Suggested Citation

  • Shekhar Aiyar & Sonali Jain-Chandra, 2012. "The Domestic Credit Supply Response to International Bank Deleveraging; Is Asia Different?," IMF Working Papers 12/258, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/258
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    References listed on IDEAS

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    1. Giannetti, Mariassunta & Laeven, Luc, 2012. "The flight home effect: Evidence from the syndicated loan market during financial crises," Journal of Financial Economics, Elsevier, vol. 104(1), pages 23-43.
    2. Nicola Cetorelli & Linda S. Goldberg, 2008. "Banking globalization, monetary transmission, and the lending channel," Staff Reports 333, Federal Reserve Bank of New York.
    3. Ralph De Haas & Neeltje Van Horen, 2012. "International Shock Transmission after the Lehman Brothers Collapse: Evidence from Syndicated Lending," American Economic Review, American Economic Association, vol. 102(3), pages 231-237, May.
    4. Aiyar, Shekhar, 2011. "How did the crisis in international funding markets affect bank lending? Balance sheet evidence from the United Kingdom," Bank of England working papers 424, Bank of England.
    5. Shekhar Aiyar, 2012. "From Financial Crisis to Great Recession: The Role of Globalized Banks," American Economic Review, American Economic Association, vol. 102(3), pages 225-230, May.
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    Cited by:

    1. Sonali Jain-Chandra & Min Jung Kim & Sung Ho Park & Jerome Shin, 2013. "The Impact of Foreign Bank Deleveraging on Korea," Working Papers 2013-25, Economic Research Institute, Bank of Korea.

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