Abstract
The global financial crisis and the related sharp reduction in cross-border credit have reignited the debate about the risks of financial globalization. We use loan-level data on lending by the largest international banks to their various countries of operation to examine how banks reduced cross-border credit after the collapse of Lehman Brothers. Country-, firm-, and bank-fixed effects allow us to disentangle credit supply and demand and to simultaneously control for the unobserved traits of banks as well as the countries and firms they lend to. We document substantial heterogeneity in the extent to which different banks retrenched from the same country: there was no blanket ‘run for the exit’. Instead, banks reduced credit less to markets that were geographically close; where they had more lending experience; where they operated a subsidiary; and where they were integrated into a network of domestic co-lenders. Deeper financial integration is associated with more stable cross-border credit during times of crisis.
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