Bank Relationships, Business Cycles, And Financial Crises
The importance of information asymmetries in the capital markets is commonly accepted as one of the main reasons for home bias in investment. The authors posit that effects of such asymmetries may be reduced through relationships between banks established through bank-to-bank lending and provide evidence to support this claim. They construct a global banking network of 7938 banking institutions from 141 countries to analyze the formation of new relationships between banks during 1980-2009 time periods. They find that recessions and banking crises tend to have negative effects on the formation of new connections and that these effects are not the same for all countries or all banks.