Published on All About Finance

Shocks abroad, pain at home?

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The U.S. and Western Europe suffered their worst banking crisis since the 1930s with global wholesale liquidity evaporating and Western banks suffering important losses. The crisis followed a period in which the globalization of the financial system dramatically deepened. European banks, in particular, extended their operations in the international wholesale market and increased their presence in many countries through the establishment of a foreign branch or subsidiary. Did this increased dependency on international wholesale funding and the growth of foreign bank presence intensify the international transmission of financial shocks?

Building on the seminal works of Peek and Rosengren (1997, 2000) a number of papers provide evidence that international transmission of financial shocks through banks indeed takes place. (e.g. Cetorelli and Goldberg 2011; Claessens and van Horen 2013; Cull and Martinez Peria 2012; de Haas and van Lelyveld 2013; Puri, Rocholl and Steffen 2011;  Schnabl 2012; de Haas and van Horen 2012). How this impacts real economic activity is, however, mostly unclear. In a recent paper with Steven Ongena and Jose Luis Peydro we find that both reliance of domestic banks for their funding on international wholesale markets and foreign bank ownership provide channels through which the global financial crisis could spread and that this transmission has important negative consequences for the real economy.

In our study we exploit unique, detailed, matched bank-firm-level data of 256 different banks  having relationships with 45,660 firms, mostly SMEs, located across 14 countries in Eastern Europe and Central Asia. Specifically, we differentiate between domestic banks that during the pre-crisis boom period where dependent on international wholesale funding, foreign owned banks and domestic banks that were only funded locally. On the firm side we differentiate between firms that were in the pre-crisis period dependent on bank credit and those that were not (i.e., that only relied on a bank for a checking or a savings account). We posit that firms with outstanding credit are more dependent on their bank for financing and, therefore, should be more affected by any negative shock hitting their bank. For firms without outstanding credit, a shock to their bank should have no (or a much more subdued) impact as these firms simply use their bank to deposit funds.

Main findings

When we analyze the behavior of the banks we find that, compared to domestic banks that are funded only locally, internationally-borrowing domestic and foreign owned banks contract their lending more during the crisis. However, this result could be driven by these banks lending to firms with higher risk or a lower demand for credit during the crisis and, therefore, does not provide clear and convincing evidence that transmission took place. Furthermore, the aggregate nature of the data implies that results are driven by adjustments in lending to large firms, potentially hiding the fact that especially credit to SMEs is contracting.

However, our firm-level regressions confirm that an international transmission of financial shocks occured. Controlling for a large number of firm characteristics, we find that credit-dependent firms with a (lending) relationship with these internationally-borrowing domestic or foreign banks suffer on average worse financial and real effects than those credit-dependent firms linked to locally-funded banks. Specifically, they experience a larger drop in short-term debt, see their profits deteriorate more, and experience a sharper reduction in their total assets and operational revenue growth between 2008 and 2009. Moreover, we find that the adverse shock to credit has a much stronger impact on firms with a single bank relationship, firms that are small, or that have less tangible assets they can pledge as collateral. Finally, for credit-independent firms we do not find a differential impact with respect to the type of bank the firm has a (deposit) relationship with.


Our study uncovers channels of international transmission through domestic banks’ reliance on international wholesale funding and through foreign ownership of local banks. Both channels have a significant impact on the real economy, especially affecting firms that have a hard time switching to alternative sources of funding when their bank is hit by a shock.


Cetorelli, Nicola, and Linda S. Goldberg, 2011, Global Banks and International Shock Transmission: Evidence from the Crisis, International Monetary Fund Economic Review 59, 41–76.

Claessens, Stijn, and Neeltje van Horen, 2013b, Impact of Foreign Banks, Journal of Financial Perspectives 1, 1–18.

Cull, Robert, and Maria Soledad Martinez Peria, 2012, Bank Ownership and Lending Patterns During the 2008-2009 Financial Crisis: Evidence from Latin America and Eastern Europe, Working Paper 6195, World Bank.

de Haas, Ralph, and Neeltje van Horen, 2012, Decomposing the International Bank-Lending Channel during the 2008-09 Financial Crisis, American Economic Review Papers and Proceedings 102, 231–237.

de Haas, Ralph, and Iman van Lelyveld, 2013, Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm, Journal of Money, Credit and Banking Forthcoming.

Peek, Joe, and Eric S. Rosengren, 1997, The International Transmission of Financial Shocks: The Case of Japan, American Economic Review 87, 495–505.

Peek, Joe, and Eric S. Rosengren, 2000, Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States, American Economic Review 90, 30–45.

Puri, Manju, Jörg Rocholl, and Sascha Steffen, 2011, Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Supply and Demand Effects, Journal of Financial Economics 100, 556–578.

Schnabl, Philipp, 2012, The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market, Journal of Finance 67, 897–932.

Disclaimer: The views expressed in this column are those of the author only and do not necessarily reflect the views of the De Nederlandsche Bank or the Eurosystem.


Neeltje van Horen

Senior Economist, De Nederlandsche Bank.

Steven Ongena

Professor of Banking, University of Zurich

José-Luis Peydró

Professor of Finance, Imperial College Business School

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