Internet Appendix to "The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market"1

A. Model of International Lender’s Response To Liquidity Shocks The objective of my model is to formalize the idea that bank ownership a¤ects the provision of …nancing after a liquidity shock. The key assumption in the model is that owners can control the investment decisions of banks in which they have equity holdings, but arm’s-length lenders cannot. This assumption is motivated by the di¢ culty to verify or monitor bank investment decisions at arm’s length. The intuition of the model is that the control of bank investment decisions becomes more important as the cost of …nancing increases, leading to di¤erent responses by owners and arm’s-length lenders after a liquidity shock. More formally, I assume that the only business activity of banks is to …nance investment projects. All investment projects are of the same size and are normalized to one. There are two types of projects, safe and risky. If a bank invests in a safe project, the project yields S > 1. If the bank invests in a risky project, the project yields R > S with probability p, and zero with probability (1 p). Risky projects have a lower expected value than safe projects, such that pR < S. I make this assumption to allow for risk shifting by banks. Banks re…nance investment projects by borrowing from international lenders. There are two types of international lenders, arm’s-length lenders and owners, and two types of banks, foreignand domestically owned banks. Banks are operated by managers who maximize the value of bank equity. Suppose a domestically owned bank (e.g., Banco Wiese) borrows one unit of capital from an arm’slength lender (e.g., UBS) and promises to repay D. If the manager invests in safe projects, then the payo¤ is (S D). If the manager invests in risky projects, then the expected payo¤ is p(R D). The manager maximizes the bank equity value and therefore invests in safe projects if and only if D S pR (1 p) . I summarize this result as the …rst Proposition IA.1, where D = (1 + r) such that r denotes the interest rate on arm’s-length lending.