Dissecting Foreign Bank Lending Behavior During the 2008-2009 Crisis

Abstract

This paper analyzes the lending behavior of foreign-owned banks during the recent global crisis. Using bank-level panel data for 51 countries, the paper explores the role of affiliate and parent financial characteristics, host location, as well as the impact of parent geographic origin and reach on foreign banks' credit growth. Overall, the analysis finds robust evidence that foreign banks curtailed the growth of credit relative to other banks, independent of the host region in which they operate. Banks from the United States reduced loan growth less than other parent banks. Neither the global nor regional reach of parent banks influenced the lending growth of foreign affiliates. Parent capitalization and not parent funding explained the behavior of foreign bank credit growth during the global crisis. However, funding did affect the lending behavior of domestic and foreign banks in host countries, with those relying more heavily on deposits suffering a smaller decline in bank lending. Although not the focus of the paper, we also find that government-owned banks played a countercyclical role in all regions.

The Global Economic Crisis and Its Impact on Bank Lending in Indonesia

“…This means the crisis has no significant impact on lending. The results are different from previous studies that found significant negative impacts of the crisis on lending (Silalahi, Wibowo, & Nurlian, 2012;Allen, Jackowicz, & Kowalewski, 2013;Choi, 2013;De Haas & Van Lelyveld, 2014). These results indicate the overall banking industry in Indonesia during the global economic crisis that occurred in 2008-2009 did not affect the decline in bank lending in Indonesia.…”

“…Allen, Jackowicz, & Kowalewski (2013) investigated the impact of the global economic crisis on lending of foreign banks and state-owned banks in the European region. While Choi (2013) examines the impact of the global crisis on lending in Europe, West Asia, and Latin America. This study complements these 3 studies in particular to examine the impact of the global economic crisis of 2008 and 2009 on lending foreign banks, joint ventures bank, domestic banks, and state-owned banks during 2002-2015 in Indonesia.…”

“…Several studies that interacted with the liquidity crisis found that the higher liquidity of banks will reduce the impact of the global eco-nomic crisis on credit growth. Choi (2013) found that liquidity interaction has a positive effect on the relationship with the bank lending with crisis. This finding shows that the increased liquidity of banks before the crisis will make banks have a high supply of funds and do not make banks worried about the impact of the crisis.…”

“…For banks that behave in reducing lending, this is because the nature and scale of sharpness of the global financial crisis leads to a reduction in capital support from the parent bank. This condition has an impact on the parent of a foreign bank so that the crisis affects less bank lending in home country and host country (Silalahi, Wibowo, & Nurlian, 2012;Choi, 2013;De Haas & Van Lelyveld, 2014).…”

Credit booms and busts in emerging markets

“…Concerns about a dramatic credit crunch in the Central and Eastern European countries led to a concerted effort by regulators and multilateral institutions to preserve minimum levels of lending (De Haas et al, 2015). The crisis triggered an increasing research effort to disentangle the factors that drove the fall of credit growth in most countries from this region (see e.g., Choi et al, 2013;Feyen et al, 2014). In this section, we explore the role of risk management and corporate governance on banks' credit activity during the crisis.…”