The Domestic Credit Supply Response to International Bank Deleveraging: Is Asia Different?

Shekhar Aiyar and Sonali Jain-Chandra

No 2012/258, IMF Working Papers from International Monetary Fund

Abstract: During the global financial crisis, European banks contracted foreign claims on recipient economies sharply. This paper examines the impact of that deleveraging on credit supply in recipient economies, with a particular focus on Asia. Identification is achieved by exploiting heterogeneity in ex-ante patterns of funding reliance on different European banking systems, and in variation in the ratio of local claims in local currency to total foreign claims in recipient economies. These sources of variation are used to create instruments for the deleveraging shock. We find that the contraction in European bank foreign claims was associated with a substantial reduction in domestic credit supply in a broad sample of countries. However, the credit supply response in Asia was only about half the size of the response in non-Asian countries, possibly due to a more robust policy response and healthier local bank balance sheets at the outset of the crisis.

Keywords: WP; Asia; Asia intercept; supply response; Global banks; liquidity shock; cross-border lending; instrumental variables; bank capital injection; parent bank; Fed swap lines; Foreign currency exposure; Domestic credit; Foreign banks; Credit; Bank credit; Asia and Pacific; Global (search for similar items in EconPapers)
Pages: 15
Date: 2012-10-26
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Citations: View citations in EconPapers (3)

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