Abstract
Abstract. This paper focuses on the transmission of bank liquidity shocks in Loan and deposit in emerging markets. First, we attempt to identify factors affecting the credit strategy of foreign banks in emerging countries. Second, we test whether depositors exert market discipline on foreign subsidiaries. By combining financial variables of subsidiaries and their parent banks and macroeconomic variables of host and home countries, we investigate the factors that may affect the behavior of depositors. Our empirical approach is based on a Partial Least Squares-Path model that allows us to indentify the causal relationships between the various groups of variables. Our results show that foreign bank lending is determined by the specific financial variables of the parent bank and macroeconomic variables of the country of origin. This support that the strategy's credit of foreign subsidiary is centrally managed at the parent bank and credit supply of subsidiaries depends primary on the financial situation of its parent bank. Finally we find evidence of market discipline exercised over foreign subsidiaries in emerging countries. We show that market discipline is strongly affected by the specific characteristics of the subsidiary.
Highlights
The world today is characterized by perfect capital mobility which has accelerated the transmission of shocks from developed to emerging countries
Some studies have concluded that the existence of subsidiaries of foreign banks in emerging countries favor the transmission of liquidity shocks to banks from developed countries to emerging countries
The sample used in this study focuses on banks' subsidiaries existing in emerging countries and whose parent banks are located in developed countries
Summary
The world today is characterized by perfect capital mobility which has accelerated the transmission of shocks from developed to emerging countries. It is argued that large banks have played an important role in the transmission of liquidity shocks through their subsidiaries established in foreign countries. Some studies have concluded that the existence of subsidiaries of foreign banks in emerging countries favor the transmission of liquidity shocks to banks from developed countries to emerging countries. Foreign banks have significantly expanded their range of activities in emerging economies. They mainly offered financial services to international companies. Foreign banks has no longer a passive response quite changing needs of existing customers, but a dynamic exploration of new markets in the host country. The distress of many emerging banking systems has caused the phenomena of credit crunch, an extreme form of rationing behavior
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