Cross-Border Bank Lending, Risk Aversion and the Financial Crisis

Abstract

The study investigates the provision of long-term loans to foreign firms as one important activity of internationally active banks. In 2003 to 2010, we look at quarterly data on long term loans to the private sectors of 73 countries by the largest 70 German banks. We find high relevance of bank specific factors, in particular of changes in the individual risk position of a bank. Using measures such as the core capital ratio, we show that during the financial crisis, the risk aversion of banks increased, which is in line with the strong reduction of their cross-border lending activities. This outcome is supported by a negative effect of tighter credit standards reported in the Bank Lending Survey on foreign lending during the crisis. We identify a trade-off relationship between lending abroad and lending at home only in the course of the financial crisis. Local factors like macroeconomic demand and risk show much less relevance than loan supply determinants. However, foreign country characteristics gain some relevance when loans to foreign firms are channelled through affiliates located abroad. We conclude that affiliates abroad behave rather like local banks, while German parent banks’ direct cross-border lending exclusively depends on supply-side determinants.