Bank Structure and Liquidity Shocks: Evidence from Emerging Markets During the 2008 Financial Crisis

Pu Liu, Yingying Shao () and Yiwen Gu ()
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Pu Liu: Finance Department, Sam M. Walton College of Business, University of Arkansas, Fayetteville, Arkansas 72701, USA
Yingying Shao: Department of Finance, College of Business and Economics, Towson University, USA
Yiwen Gu: College of Business, University of Dallas, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2017, vol. 20, issue 03, 1-25

Abstract: There is ample evidence on how bank structure (bank concentration, development of the banking sector, and presence of foreign banks) is related to credit supply and economic growth. However, little is known about how bank structure affects credit supply when the banking sector itself is in crisis and thus credit supply is impaired. The paucity of studies in examining the relationship between bank structure and credit supply during financial crisis is probably due to the complication that bank structure itself is significantly related to financial crisis. In this study, we avoid the endogeneity problem caused by the correlation between bank structure and financial crisis by studying the stock price performance of firms in 20 emerging countries during the 2008 financial crisis because the financial hardship in these countries was caused exogenously by the crisis originated from the U.S. We find firms that are more dependent on external financing tend to suffer greater stock price declines. However, the severity of the decline is significantly smaller for firms in countries with higher level of bank concentration, greater advancement in banking sector, and higher level of foreign bank presence. The results suggest that bank concentration, bank development, and foreign bank presence all contribute to the alleviation of liquidity crunch caused by crisis transmitted from other countries.

Keywords: Banking concentration; external financing; financial crisis; bank development (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0219091517500151

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