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Global Banks And International Shock Transmission: Evidence From The Crisis

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Executive Summary

Global banks played a significant role in transmitting the 2007-09 financial crisis to emerging-market economies. The authors examine adverse liquidity shocks on main developed country banking systems and their relationships to emerging markets across Europe, Asia, and Latin America, isolating loan supply from loan demand effects. Loan supply in emerging markets across Europe, Asia, and Latin America was affected significantly through three separate channels: a contraction in direct, cross-border lending by foreign banks; a contraction in local lending by foreign banks' affiliates in emerging markets; and a contraction in loan supply by domestic banks, resulting from the funding shock to their balance sheets induced by the decline in interbank, cross-border lending.

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