Rise of Domestic Banks in EME Cross-border Credit Intermediation

Abstract

While the volume of cross-border capital inflow to emerging market economies (EMEs) has been increasing since 1970s, the last three decades have witnessed a more pronounced change in the structure of these cross-border capital flows. In this paper, we document the rise of domestic global banks in EMEs and the growingly important role they have played in channeling cross-border capital since the 1990s. We further provide evidence that this structural change in the cross-border capital flow to EMEs is likely to be driven by the transformation of the U.S. money market since the end of the 1980s. Using detailed documentation on cross-border loans, we demonstrate that foreign and domestic lenders have drastically different preferences on lending bases when extending credit to corporations in EMEs: foreign lenders exhibit a much higher reluctance to lend against hard assets as collateral. On the basis of differentiated lending technologies, we show that the rise of domestic global banks in channeling cross-border capital to EMEs has had a profound impact on i) who receives the capital and ii) how the capital is received. Inspired by these micro-level findings, we conduct a cross-country analysis and find that the rise of domestic global banks in transmitting cross-border capital to EMEs can have a far-reaching impact on these economies at the aggregate level. In particular, we find that the rise of domestic global banks in EMEs can greatly i) reshape the industry structure of these economies and ii) increase the economies’ susceptibility to global financing cycles.