Withdrawal from Foreign Lending in the Financial Crisis by Parent Banks and Their Branches and Subsidiaries: Supply Versus Demand Effects

This study investigates the different channels through which internationally active banks can provide loans abroad. Using data on German banks from 2002 to 2010, we contrast determinants for cross-border lending by the parent bank with lending by affiliates located abroad. We show that lending by parent banks is based almost entirely on supply-side determinants, in particular on bank-specific factors. The more the loans are intermediated by banks’ affiliates located abroad, the more relevant become foreign countries’ demand and risk characteristics. This applies in particular when banks operate via locally focused affiliates - rather than regionally active hub affiliates - as well as when the affiliates have the status of branches as opposed to legally independent subsidiaries. In general, banks with a greater risk aversion withdraw more from foreign lending during the financial crisis, especially following the collapse of Lehman Brothers. However, at a Tier I capital ratio of around 11 %, a further increase in the ratio did not affect lending anymore.     

Intra- and inter-regional portfolio diversification strategies under regional market integration: Evidence from U.S. global banks

This study empirically assesses whether being a part of any specific region affects global banks' decisions on capital allocation across 20 developed and 44 emerging markets by using data on U.S. banks in the period from 2006 to 2015. We find that both the intra-bank lending of a parent bank to its affiliates abroad and the local lending of foreign affiliates decrease as internal lending to neighboring countries within a region increases. This finding provides evidence of the negative spillover or contagion effects from regional allocations on the capital allocation of global banks to individual economies. Our findings reflect that financial markets are integrated within the region, which suggests no intra-regional diversification benefits to the United States or to other global investors. Moreover, parent banks' intra-bank lending translates into foreign affiliates' local lending in the host country. A policy implication is that countries in the same region should strengthen coordinated efforts to ensure free intra-regional capital mobility and diversify country-specific risk. The findings of this study can help enhance our understanding of the relationships between financial markets interconnectedness and global banks' portfolio management strategies.     

Dissecting Foreign Bank Lending Behavior During the 2008–2009 Crisis

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.     

Liquidity crisis,relationship lending and corporate finance

This paper investigates the consequences of the liquidity shocks in wholesale funding markets during the 2007–2009 financial crisis on bank lending and corporate financing. We show that banks that relied more heavily on wholesale funding contracted lending more severely than banks that relied more on insured deposits. We then examine the effects of loan contraction on the financial positions of publicly traded firms. We find that both during and after the crisis, the change in leverage of bank-dependent firms is less than that of firms with access to public debt markets. In addition, bank-dependent firms rely more on cash than net equity issuance to finance operations. We also find that firms with established bank lending relationships weather the crisis better. Such firms are able to attain higher levels of leverage during the crisis, add to their cash holdings, secure new bank credit, and achieve higher profitability as a result.     

Foreign bank subsidiaries' default risk during the global crisis: What factors help insulate affiliates from their parents?

This paper examines the association between the default risk of foreign bank subsidiaries in developing countries and their parents during the global financial crisis, with the purpose of determining the size and sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from their parents. We find evidence of a significant and robust positive correlation between parent banks’ and foreign subsidiaries’ default risk. This correlation is lower for subsidiaries that have a higher share of retail deposit funding and that are more independently managed from their parents. Host country bank regulations are also associated with the extent to which shocks to the parents affect the subsidiaries’ default risk. In particular, the correlation between the default risk of subsidiaries and their parents is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements, and tougher restrictions on bank activities.     

The interest rate pass-through in the euro area during the sovereign debt crisis

We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the pass-through has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.     

Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm?

We use data on the 48 largest multinational banking groups to compare the lending of their 199 foreign subsidiaries during the Great Recession with lending by a benchmark of 202 domestic banks. Contrary to earlier and more contained crises, parent banks were not a significant source of strength to their subsidiaries during 2008–09. When controlling for other bank characteristics, multinational bank subsidiaries had to slow down credit growth almost three times as fast as domestic banks. This was in particular the case for subsidiaries of banking groups that relied more on wholesale funding.     

Foreign Banks in Transition Countries: To Whom Do They Lend and How Are They Financed?

We use focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States to analyze the small‐business lending and internal capital markets of multinational financial institutions. Our approach allows us to complement the standard empirical literature, which has difficulty in analyzing important issues such as lending technologies and capital allocation. We find that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply toward large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets. Second, it is demonstrated that local bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank.     

The effect of the Federal Reserve’s lending facility on PPP lending by commercial banks

We investigate whether the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) boosted commercial bank Paycheck Protection Program (PPP) lending. To determine whether this facility had a causal effect, we use pre-existing familiarity with the Federal Reserve’s discount window as an instrumental variable. We show that the PPPLF materially bolstered bank PPP lending and provided a meaningful funding backstop for banks that did not use the facility. Our paper is one of the first to quantitatively illustrate the effectiveness of a central bank facility as a funding backstop.     

The international transmission of bank capital requirements: Evidence from the UK

We use data on UK banks? minimum capital requirements to study the impact of changes to bank-specific capital requirements on cross-border bank loan supply from 1999Q1 to 2006Q4. By examining a sample in which each recipient country has multiple relationships with UK-resident banks, we are able to control for demand effects. We find a negative and statistically significant effect of changes to banks? capital requirements on cross-border lending: a 100 basis point increase in the requirement is associated with a reduction in the growth rate of cross-border credit of 5.5 percentage points. We also find that banks tend to favor their most important country relationships, so that the negative cross-border credit supply response in “core” countries is significantly less than in others. Banks tend to cut back cross-border credit to other banks (including foreign affiliates) more than to firms and households, consistent with shorter maturity, wholesale lending which is easier to roll off and may be associated with weaker borrowing relationships.     

International monetary policy spillovers through the bank funding channel

In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks’ funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers through a bank funding channel. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy.     

Across-the-Curve Credit Spread Indices

We design a novel across-the-curve credit spread index, AXI, a measure of the recent cost of wholesale unsecured debt funding for publicly listed US bank holding companies and commercial banks. AXI, a benchmark for bank lending and risk management, is the weighted average of credit spreads for unsecured debt instruments with maturities ranging from overnight to five years, with weights that reflect both transaction and issuance volumes. We provide illustrative output of the bond-based component of AXI. By widening coverage to include all corporate debt issuers, we also build a financial conditions index (FXI).     

Explicit deposit insurance design: International effects on bank lending during the global financial crisis✰

Studies find that during the 2007–2009 global financial crisis, loan spreads rose and corporate lending tightened, especially for foreign borrowers (a flight-home effect). We find that banks in countries with explicit deposit insurance (DI) made smaller reductions in total lending and foreign lending, experienced smaller increases in loan spreads, and had quicker post-crisis recoveries. These effects are more pronounced for banks heavily relying on deposit funding. Evidence also reveals that more generous or credible DI design is associated with a stronger stabilization effect on bank lending during the crisis, confirmed by the difference-in-differences analysis based on expansion of DI coverage during the crisis. The stabilization effect is robust to the use of country-specific crisis measures and control of temporary government guarantees.     

Bank loans during the 2008 quantitative easing

We examine the effect of quantitative easing on the supply of bank loans. During the Fed’s quantitative easing programs, lending banks reduced relatively more loan spreads, offered longer loan maturities, provided larger loans, and loosened more covenants for firms whose long-term bond ratings were below BBB and were lower than those with investment-grade bond ratings. Furthermore, we find that new bank loans in this period were associated with a reduction in a firm’s value and an increase in default risk. These results indicate that banks took greater risk during the 2008 quantitative easing by relaxing lending standards to relatively riskier borrowers.     

The role of securitization in bank liquidity and funding management

This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks' holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks' lending activity but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.     

Do Banks Follow Their Customers Abroad?

The market share of US business loans made by foreign‐owned banks has increased dramatically since 1980. At the same time, foreign direct investment in the US rose, so that much of the growth in foreign‐owned US‐based bank lending to businesses in the US could conceivably be accounted for by an increase in loans to the nonbank US affiliates of firms headquartered abroad, an expectation consistent with the conventional wisdom that banks "follow their customers" abroad. Our study investigates the lending patterns of US‐based banks from Japan, Canada, France, Germany, the Netherlands, and the UK, countries that account for the vast majority of foreign bank activity in the US. Simultaneously, we look at the borrowing patterns of nonbank US affiliates of firms from those countries. We find that banks from four of the six countries (Japan, Canada, the Netherlands, and the UK) allocated a majority of their loans to non‐home‐country borrowers for some or all of the 1981–1992 period. These findings suggest that the "follow the customer" hypothesis may have a more limited applicability than previously supposed.     

Intertemporal diversification in financial intermediation

This paper examines the incentive problem between a bank and depositors (or deposit insurer): limited liability makes risk-shifting lucrative. We show how intertemporal diversification of lending decisions – i.e. bank’s loan portfolio consists of overlapping long-term loans and is thus gradually renewed – may solve the incentive problem of risk-shifting. A new (or expanding) bank sets a high-equity level and acquires depositors’ confidence. Subsequently, it can allow its equity to depreciate to a permanently lower level. Depositors can control the bank by monitoring equity and realized credit losses ex post; they do not have to monitor bank’s lending choices ex ante. Maturity mismatch – illiquidity of long-term loans and liquidity of deposits – is optimal. The analysis can be extended more generally to the borrower–lender relationship.     

Crises,Liquidity Shocks,and Fire Sales at Commercial Banks

If liquidity shortages cause financial crises, a lender of last resort can provide funds to banks facing potential fire sales. However, if funding problems primarily occur at banks with existing solvency problems, then government liquidity programs may not spur bank lending. We find that commercial bank funding does not typically dry up in a crisis, not even during the subprime crisis. Rather, weak banks are more likely to borrow less. Furthermore, banks rely more on deposits and newly issued equity than fire sales. When they do sell assets, they cherry pick assets in order to alleviate pressure from capital regulations.     

FINANCIAL TRANSACTIONS WITHIN BANK HOLDING COMPANIES

This study explores financial transactions within bank holding companies in both a theoretical and an empirical context. Empirical analysis focuses on two major types of interaffiliate financial transactions—extensions of credit and transfers of assets—between holding company banks and their nonbank affiliates (defined to include the parent company and nonbank subsidiaries of the parent) over the period 1976–1980. The data generally point to a net downstream flow of funds from the nonbank sector to the bank sector of a holding company, with the downstream fund flows particularly strong in the case of extensions of credit. In part, this result may reflect the statutory restrictions on bank lending to affiliates, particularly the collateral requirements.     

What happened to profitability? Shocks,challenges and perspectives for euro area banks

This paper analyses the evolution of bank profitability from 2005 to 2016, with a focus on the period covering both the global financial crisis and the euro area crisis. To accomplish this, we constructed a dataset that includes financial statement information from 310 euro area banks. Using a dual approach – a ‘bottom-up’ approach as applied by bank analysts and macroeconomists' ‘top-down’ approach, we find that the profitability of euro area banks was hit by two shocks of different nature. The Lehman Brothers collapse affected mostly big banks with diversified portfolios via losses in their securities investment. The subsequent euro area debt crisis and economic recession hit more traditional banks specialising in retail lending activities, mainly through increasing impairment costs. If the first shock had a one-off impact on bank profitability, the second shock is far more long-lasting and is still depressing the profitability of banks in peripheral Europe.