Foreign Banks, monetary policy, and crises: Evidence from bank-level panel data in asia

Abstract

Abstract This chapter examines how foreign banks respond to domestic monetary policy in host countries during crisis periods, in particular, the response shown toward the Asian financial crisis of 1997–1999 and the global financial crisis of 2008–2009. By observing 283 domestic and foreign banks in seven emerging Asian economies, we find that foreign banks are slower than domestic banks in adjusting the growth of their loans to changes in host monetary policy. This inertia by foreign banks is found to be more pronounced in the recent 2008–2009 global crisis than in the 1997–1999 Asian regional crisis, suggesting that the buffering/hampering effects of foreign banks on the effectiveness of the domestic monetary policy transmission mechanism become stronger in a recent global crisis originating from outside Asia than a regional crisis imploded within Asia a decade earlier. We also find that foreign banks’ lower sensitivity than domestic banks to host monetary policy during the crisis periods is heterogeneous, depending on factors such as the extent of the adverse impact of crises on parent banks, the scope of business operation by parent banks, and foreign banks’ mode of entry into host banking markets.