Channels and Determinants of Foreign Bank Lending

Recent crises invigorated debate about the financial stability risks associated with different forms of foreign bank lending. Would a more decentralised model of international banking – in which a greater proportion of international banking business is carried out in the country where banks operate rather than across borders – be more desirable from a financial stability point of view? This paper sheds light on aspects of this debate by using the BIS international banking statistics to investigate the channels through which foreign banks might transmit shocks across borders and to analyse the determinants of banks' decision whether to lend locally or cross-border. Focusing on the Asia-Pacific region, we find increasing concentration among foreign bank creditors, owing in part to the rising market share of banks headquartered within the region. Thus the region continues to be vulnerable to shocks in individual creditor countries. That said, foreign banks' share of aggregate bank credit is low in all but a few Asia-Pacific countries. We also find that the state of the banking system in the borrower country has a significant influence on the form of foreign lending. Intermediation by foreign banks takes the form of local lending where banking systems are relatively more fragile or less developed, and cross-border lending where banking systems are relatively more stable or advanced.Full publication: 'http://ssrn.com/abstract=2668657' Cross-Border Financial Linkages: Challenges for Monetary Policy and Financial Stability