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Bank liquidity shocks in loan and deposit in emerging markets

  • Mehdi Mili
  • Jean-Michel Sahut

Abstract. This paper focuses on the transmission of bank liquidity shocks in loan and deposit in emerging markets. First, we attempt to identify the factors that affect the credit strategy of foreign banks in emerging countries. Second, we test whether depositors do exert market discipline on foreign subsidiaries. Combining between financial variables of subsidiaries, their parent banks, and macroeconomic variables of host and home countries, we investigate the factors that are likely to impact the depositors’ behaviour. Our empirical approach is based on a Partial Least Squares-Path model, through which we can identify the causal relationships between the various groups of variables. Our results show that foreign bank lending is determined by the specific financial variables of the parent bank as well as macroeconomic variables of the country of origin. This means that the foreign subsidiary’s strategy credit is centrally managed at the parent bank and that subsidiaries’ credit supply depends primarily on the financial situation of its parent bank. Finally, we evidence market discipline as applied to foreign subsidiaries in emerging countries. We demonstrate that market discipline is strongly affected by the specific characteristics of the subsidiary.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-210.

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Length: 26 pages
Date of creation: 10 Apr 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-210
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Web page: http://www.ipag.fr

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  1. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
  2. Loupias, Claire & Savignac, Frédérique & Sevestre, Patrick, 2001. "Monetary policy and bank lending in France: are there asymmetries?," Working Paper Series 0101, European Central Bank.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  5. Allen, Franklin & Hryckiewicz, Aneta & Kowalewski, Oskar & Tumer-Alkan, Gunseli, 2010. "Transmission of Bank Liquidity Shocks in Loan and Deposit Markets: The Role of Interbank Borrowing and Market Monitoring," Working Papers 10-28, University of Pennsylvania, Wharton School, Weiss Center.
  6. De Haas, Ralph & van Lelyveld, Iman, 2009. "Internal Capital Markets and Lending by Multinational Bank Subsidiaries," MPRA Paper 13164, University Library of Munich, Germany.
  7. Ralph de Haas & Iman van Lelyveld, 2003. "Foreign Banks and Credit Stability in Central and Eastern Europe: A Panel Data Analysis," DNB Staff Reports (discontinued) 109, Netherlands Central Bank.
  8. Gambacorta, Leonardo, 2005. "Inside the bank lending channel," European Economic Review, Elsevier, vol. 49(7), pages 1737-1759, October.
  9. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  10. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.
  11. Klapper, Leora F. & Love, Inessa, 2004. "Corporate governance, investor protection, and performance in emerging markets," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 703-728, November.
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