Foreign Banks and Financial Shock Transmission: The Asian Experience - E046
This project is the first documented attempt to use micro data to scientifically evaluate how changes in foreign banks’ lending behaviour during the 2007-2009 GFC impacted credit stability and the real economy in the Asian region. The study examined the roles played by two channels of shock transmission - bank ownership and liquidity - in transmitting the GFC to Asian loan markets.
The research found that:
• bank ownership was not a significant source of transmission; and
• liquidity was a major source of transmission.
The study shows that the link between foreign bank ownership and shock transmission is losing relevance in the Asian emerging markets. Foreign ownership per se does not seem to be a risk factor and is uncorrelated with financial volatility. Moreover, the increasing importance of local currency lending by foreign banks in Asia has made foreign bank lending more stable. While the contraction of foreign currency liquidity during the GFC was partially offset by domestic currency lending, this substitution occurred within banks, and not between banks, due to high switching costs. This evidence provides support for opening markets to foreign bank entry, and encouraging foreign banks to borrow in local markets to finance local assets and move from wholesale to retail funding. Diversifying funding sources can help mitigate the risk of contagion.
The study highlights the importance of liquidity management and the challenges facing national monetary authorities. The liquidity risks and funding conditions of banks need to be frequently monitored, and resources need to be put in place to manage liquidity tensions as they arise to avoid them magnifying and spreading.
Dr Ying Xu presenting at CIFR Symposium on Systemic Risk.
Sydney, 08 August 2013
This research has also been presented at several conferences:
Regional Integration and Financial Stability Workshop
ANU, Canberra (April 2013)
Performance of Financial Markets Symposium
Deakin University, Melbourne (June 2013)
CIFR Symposium on Systemic Risk
Sydney (August 2013)
International Conference in Finance
Vietnam (June 2014)