Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19

September 16, 2022

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Format: Chicago

Weijia Yao, Anamika Sen, and Juan Yepez. Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper studies whether bank ownership influenced lending behavior during the COVID-19 shock. It finds that, similar to previous episodes of financial distress, foreign banks appear to have played a shock-transmitting role, as there was a sharp slowdown in lending by foreign banks’ affiliates relative to domestic banks. However, given the uniqueness of the COVID-19 shock and the impact of lockdowns on economic activity, foreign banks were found to lend at a higher rate than domestic banks once the stringency of mobility restrictions is accounted for, with their lending portfolio concentrated more in the corporate sector. Results also suggest that the difference in lending rates between foreign and domestic banks could be explained by the heterogeneous effects of policy measures in response to the pandemic. In jurisdictions with more stringent mobility restrictions, policy interventions actually encouraged higher lending by foreign banks. These findings suggest that foreign bank presence may have acted as a shock absorber in jurisdictions where economic activity was most affected by the pandemic.

Subject: Bank credit, COVID-19, Credit, Credit ratings, Financial institutions, Foreign banks, Health, Money

Keywords: Bank behavior, Bank characteristic, Bank credit, Bank ownership, Bank size, Capital, Central America, Central and Eastern Europe, COVID-19, COVID-19., Credit, Credit ratings, Domestic bank, Financial conditions, Foreign banks, Global, Liquidity, Ownership, Ownership data, Policy announcements

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/188
Stock No:

WPIEA2022188
ISBN:

9798400222030
ISSN:

1018-5941

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