Transmission of liquidity shocks: Evidence on cross-border bank ownership linkages

Abstract

This study examines whether a liquidity shock to a banking system could be transmitted to other economies through a network of bank ownership. Firstly we construct cross-border ownership networks for banks located in European countries. We then exploit the 2010 European debt crisis as a natural experiment. The analysis shows that subsidiary banks located outside of Greece, Ireland, Italy, Portugal and Spain (GIIPS) but with ownership linkages to these countries have a lower loan growth rate during the crisis period. This suggests that the liquidity shock experienced by GIIPS countries was indeed transmitted to those banks through ownership linkages. Larger subsidiary banks and those subsidiaries that were more profitable are found to be more resilient to the shock. We also find that the parent bank's characteristics affect the transmission of the shock, supporting the notion of an internal capital market operating within these banks.

Dynamic effects of network exposure on equity markets

“…These findings are supported by Blasques et al (2016), who related high network intensity to increased spillover in the financial system. These findings are similar to Cao et al (2017), who reported that crossborder linkages tend to increase during crisis periods. Conversely, larger network intensity-especially during times of stress-are associated with increased crossborder lending, which results in transmission of stronger shocks between markets.…”

“…We can relate this to the findings of Tonzer (2015) and argue that high network intensity is associated with increased cross-border exposures. 10 Our findings are also similar to those of Cao et al (2017), who found that cross-border linkages tend to increase during crises. This could be a signal of greater propagation of shock when institutions are under distress.…”

Risk Transmission of Foreign Subsidiary in ASEAN Emerging Countries

“…In addition, liquidity crises in developed countries spread to developing countries through foreign banks in those countries. Furthermore, Cao et al (2018) show that bank subsidiaries of parent banks in Greece, Ireland, Italy, Portugal, and Spain (GIIPS) have transmitted liquidity shocks that GIIPS countries have to deal with. In addition to liquidity risk, Perić et al (2018) find that credit risk has a favorable impact on subsidiary credit risk.…”

Interdependence and portfolio optimisation of bank equity returns from developed and emerging Europe

“…Most researchers have analysed the physical trading networks based on direct contractual agreements which are related to interbank transfer of assets and liabilities (i.e., interbank lending and borrowing) (Affinito & Pozzolo, 2017;Allen & Babus, 2009;Babus, 2016;Barroso et al, 2018;Betz, Hautsch, Peltonen, & Schienle, 2016;Brunetti, Harris, Mankad, & Michailidis, 2015;Cocco, Gomes, & Martins, 2009;Degryse & Nguyen, 2007;Elsinger, Lehar, & Summer, 2006;Furfine, 2003;Glasserman & Young, 2015;Sheldon & Maurer, 1998;Silva, Alexandre, & Tabak, 2018;Silva, de Souza, & Tabak, 2016;Silva, Guerra, Tabak, & Miranda, 2016;Sun & Chan-Lau, 2017;Toivanen, 2013;Upper & Worms, 2004). Some studies have used other measures of interconnectedness as a link in the bank network; these include credit default swap contracts (Ballester, Casu, & González-Urteaga, 2016;Gandy & Veraart, 2019;Kanno, 2018;Peltonen, Scheicher, & Vuillemey, 2014), and cross-ownership of equity shares (Cao, Gregory-Smith, & Montagnoli, 2018;Dastkhan & Gharneh, 2016, 2018Elliott et al, 2014;Elsinger, 2009). However, bank network, as defined in our study, is based on economic connections identified from stock market data (i.e., correlation network of stock return dynamics), as in Diebold and Yilmaz (2014), Brunetti et al (2015), and Candelon, Ferrara, and Joëts (2018).…”