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WP/22/188
IMF Working Paper
Strategy, Policy, and Review Department
Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19 Prepared by Anamika Sen, Weijia Yao, and Juan F. Yépez*
Authorized for distribution by Martin Čihák
September 2022
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.
ABSTRACT: 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.
| JEL Classification Numbers: | E44, E65, G14, G28, G32 |
| Keywords: | Policy announcements; financial conditions; credit; ownership, capital; liquidity; COVID-19. |
| Author’s E-Mail Address: | anamikasen@umass.edu; weijiayao51@gmail.com; jyepezalbornoz@imf.org |
| JEL Classification Numbers: | E44, E65, G14, G28, G32 |
| Keywords: | Policy announcements; financial conditions; credit; ownership, capital; liquidity; COVID-19. |
| Author’s E-Mail Address: | anamikasen@umass.edu; weijiayao51@gmail.com; jyepezalbornoz@imf.org |
Title Page
WORKING PAPERS
Shock Absorbers or Transmitters?
The Role of Foreign Banks during COVID-19
Prepared by Anamika Sen, Weijia Yao, and Juan F. Yépez*
Shock Absorbers or Transmitters: The Role of Foreign Banks during COVID-19*
Anamika Sen Weijia Yao Juan F. Yepez
September 2022
Abstract
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.
JEL Codes: E44, E65, G14, G28, G32
Keywords: policy announcements, financial conditions, credit, ownership, capital, liquidity, COVID-19
Anamika Sen is a PhD candidate at University of Massachusetts Amherst. She was a summer intern in the IMF’s Strategy, Policy, and Review Department when this analytical work was prepared. Weijia Yao was a research analyst at the IMF when the work on the project was carried out. We would like to thank Martin Čihák and Fabián Valencia for helpful discussions. We are also grateful to Majid Bazarbash, Sophia Chen, Srobona Mitra, Paola Morales-Acevedo, Tomohiro Tsuruga, and seminar participants at the IMF for useful comments. All remaining errors are our own.
Anamika Sen is a PhD candidate at University of Massachusetts Amherst. She was a summer intern in the IMF’s Strategy, Policy, and Review Department when this analytical work was prepared. Weijia Yao was a research analyst at the IMF when th e work on the project was carried out. We would like to thank Martin Čihák and Fabián Valencia for helpful discussions. We are also grateful to Majid Bazarbash, Sophia Chen, Srobona Mitra, Paola Morales-Acevedo, Tomohiro Tsuruga, and seminar participants at the IMF for useful comments. All remaining errors are our own.
Anamika Sen is a PhD candidate at University of Massachusetts Amherst. She was a summer intern in the IMF’s Strategy, Policy, and Review Department when this analytical work was prepared. Weijia Yao was a research analyst at the IMF when the work on the project was carried out. We would like to thank Martin Cihak and Fabian Valencia for helpful discussions. We are also grateful to Majid Bazarbash, Sophia Chen, Srobona Mitra, Paola Morales-Acevedo, Tomohiro Tsuruga, and seminar participants at the IMF for useful comments. All remaining errors are our own.