Asia and Europe are Different? : Credit Reponse to Global Bank Deleveraging

Aiyar, Shekhar; Jain-Chandra, Sonali

doi:2013.28.2.269

Journal of Economic Integration 2013 June;28(2) :269-284.
DOI: https://doi.org/10.11130/jei.2013.28.2.269

Asia and Europe are Different? : Credit Reponse to Global Bank Deleveraging

Shekhar Aiyar, Sonali Jain-Chandra

International Monetary Fund, Washington D.C, U. S. A.

Corresponding Author: Shekhar Aiyar ,Tel: +1 2026235973, Fax: +1 2025895973, Email: saiyar@imf.org.

ABSTRACT

During the global financial crisis, European banks sharply contracted foreign claims on recipient economies. 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 the 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 of foreign claims in European bank 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 stronger policy response and healthier local bank balance sheets in the Asian countries at the outset of the crisis.

JEL Classification

G01: Financial Crises
G2: Financial Institutions and Services
E3: Prices, Business Fluctuations, and Cycles
E5: Monetary Policy, Central Banking, and the Supply of Money and Credit

Keywords: Global banks | Liquidity shock | Cross-border lending | Instrumental variables

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