Do Foreign Banks in Emerging Markets Mitigate Credit Supply Shocks? by Philipp Schnabl :: NEUDC 2007 Papers :: Northeast Universities Development Consortium Conference :: Center for International Development at Harvard University (CID)

The Russian Default of 1998 provides a natural experiment to test how global …nancial linkages transmit negative credit supply shocks to emerging markets. Using bank-level data from Peru, I show that the shock a¤ects bank lending by both foreign and domestic banks because all banks re…nance their lending abroad. Using microdata on all corporate loans, I show that foreign banks reduce lending less because of a smaller reduction in foreign debt. I rule out the main alternative explanation of heterogeneous credit demand shocks of …rms borrowing from foreign banks versus domestic banks by showing that the estimation is robust to estimating the e¤ects within …rms across bank relationships. I explain the di¤erential e¤ect by showing that domestic banks have incentives to lend to …rms owned by bank owners which reduces access to foreign debt after a credit supply shock. Finally, I show that …rms cannot o¤set the shock, leading to a lower bankruptcy rate among …rms borrowing from foreign banks.