Transmission of Shocks Through International Lending of Commercial Banks to LDCs

We analyze the transmission of shocks through international bank lending, as is suggested in Kaminsky and Reinhart [6], by examining the bank’s international lending behavior. We develop a portfolio selection model, which explicitly includes the economic condition of the bank’s home county. This model is estimated using data from the banks of the six largest international creditor countries over the 1989-99 period. Our results clarify the interrelationship between the condition of banks’ home country and international bank lending. This finding demonstrates two types of transmission of shocks through international bank lending: [i] transmission from a creditor country to debtor countries and [ii] transmission from a debtor country to other debtor countries via a creditor. ∗Satoru Shimokawa is Graduate Student and Steven Kyle is Associate Professor in the Department of Applied Economics and Management, Warren Hall, Cornell University, Ithaca, New York, 14853.