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The transmission of real estate shocks through multinational banks

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Cross-border banking has grown dramatically in recent decades through financial liberalization, consolidation, and integration around the world. In the pursuit of higher profitability and diversification, many banks extended their activities beyond their home countries, opening branches or subsidiaries abroad and making the global banking landscape more international. The share of foreign banks in host countries increased from around 25% in 2000 to 33% in 2007. Even though the share of assets owned by foreign banks declined from 13% in 2007 to 10% in 2013, the share of foreign banks as the total number of banks was still 36% in 2013 (Claessens and Van Horen, 2015).

During the Global Financial Crisis of 2007–2009, many economies experienced negative growth rates for prolonged periods. This deep recession period coincided with collapses in real estate prices in some countries, and the souring of real estate related assets such as mortgage-backed securities and real estate loans (Acharya et al., 2009). Real estate is an important asset class for banks, as they are exposed to real estate markets through their supply of mortgages, the real estate related securities they hold (such as MBS), and the use of real estate as collateral for bank loans to households and firms.

Given the prevalence of foreign banks during the last decades and the importance of real estate markets for the bank business model, a key question is to what extent the banking system transmits shocks to the pricing of real estate related assets across borders. The experiences of home countries of foreign banks are very diverse regarding the house price trends (see Figure 1 for real house price trends in countries with highly internationalized banking systems).

Figure 1. Real house price changes in select countries

Figure 1. Real house price changes in select countries

In a recent paper, I use the variation from these diverse real estate market experiences in home countries of parent banks to address the following questions:

  •  Do multinational banks transmit real estate shocks to local credit supply via their foreign subsidiaries? What are the factors determining the international transmission of real estate shocks?
  • Do real estate shocks have an impact on the functioning of internal capital markets? What is the impact on funding structures of foreign subsidiaries?

The empirical analysis relies on a large international dataset, which includes more than 600 foreign bank subsidiaries and their parent banks from 53 countries covering the period 1999-2011.  The results suggest that price changes in home country real estate markets have economically and statistically significant effects on credit growth of the foreign bank subsidiaries in host countries (specifically, a 1% decrease in real estate prices in the home country leads to a 0.2–0.3% decrease in credit growth in the foreign subsidiary). Home country banking regulation regarding the real estate activities of parent banks emerges as an important determinant, as stricter regulation reduces the cross-border transmission.

Given that the transmission of house prices changes across multinational banks, it is crucial to determine which other factors affect this transmission. The evidence suggests that core subsidiaries, which are larger in size and rely more on deposits in host countries, are less affected by changes in real estate prices at home. Moreover, foreign bank subsidiaries from neighboring or culturally related countries decrease their credit supply less in response to a negative change in home country real estate prices -suggesting better information or closer relationships (proxied by contiguity and common language) mitigate the cross-border transmission of housing prices.

The transmission of real estate market prices is asymmetric: only negative real estate price shocks have a significant impact. The effect of the capital channel (or parent support) is relevant only for the years before the recent financial crisis (in line with De Haas and van Lelyveld, 2014). Foreign subsidiaries of parent banks whose profits were more sensitive to real estate prices before 2007, experienced higher sensitivity to real estate negative shocks in the post-2007 period. This finding provides further evidence of the importance of real estate markets in cross-border transmission. Finally, the examination of the funding structure of foreign subsidiaries reveals that the changes in credit supply are mainly due to the fluctuations in long-term debt funding and equity in response to home country house price changes.

The analysis offers important policy implications for home and host country authorities. Parent banks –that face negative real estate shocks in home countries- may generate resources abroad through their foreign subsidiaries at the expense of lower credit provision in host countries. This transmission of changes in real estate prices in bad times may export the real estate shocks through foreign subsidiaries possibly deepening the ongoing crisis in host countries. There is no evidence, however, of the transmission of shocks during booms in the real estate markets of home countries, meaning that host countries did not import house price bubbles through increased credit supply of foreign subsidiaries. Credit supply is reduced less among multinational banks from home countries that are closer to the host economy (culturally or geographically), and where policy responses to financial crises are bolder, and home regulators more restrictive. For home country authorities, multinational banking is less of a concern, as it provides a reliable safety net during periods characterized by severely lower house prices. The foreign subsidiaries of those banks reduce lending abroad in response to negative house prices at home creating resources in case the parent bank need them.


Acharya, V. V., Philippon T., Richardson M., & Roubini N. (2009). The Financial Crisis of 2007-2009: Causes and Remedies, In: “Restoring Financial Stability: How to Repair a Failed System”, ed. V.V. Acharya and M. Richardson, NYU University Stern School of Business, John Wiley & Sons.

Claessens, S., & Van Horen, N. (2015). The impact of the global financial crisis on banking globalization. IMF Economic Review63(4), 868-918.

Haas, R., & Lelyveld, I. (2014). Multinational banks and the global financial crisis: Weathering the perfect storm?. Journal of Money, Credit and Banking46(s1), 333-364.


Ata Can Bertay

Assistant Professor, Sabanci University

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