Great Cross-Border Bank Deleveraging: Supply Constraints and Intra-Group Frictions

International banks greatly reduced their direct cross-border and local affiliatesa lending as the global financial crisis strained balance sheets, lowered borrower demand, and changed government policies. Using bilateral, lender-borrower countrydata and controlling for credit demand, we show that reductions largely varied in line with marketsa prior assessments of banksa vulnerabilities, with banksa financial statement variables and lender-borrower country characteristics playing...
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International banks greatly reduced their direct cross-border and local affiliatesa lending as the global financial crisis strained balance sheets, lowered borrower demand, and changed government policies. Using bilateral, lender-borrower countrydata and controlling for credit demand, we show that reductions largely varied in line with marketsa prior assessments of banksa vulnerabilities, with banksa financial statement variables and lender-borrower country characteristics playing minor roles. We find evidence that moving resources within banking groups became more restricted as drivers of reductions in direct cross-border loans differ from those for local affiliatesa lending, especially for impaired banking systems. Home bias induced by government interventions, however, affected both equally."