Throughout this period international bank claims refer to those from banks headquartered in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
This implies a 51 percent increase in real terms.
Here, total local credit refers to credit provided by all banks (both foreign and domestic) with offices in the developing world. Source: International Financial Statistics, International Monetary Fund.
“Host country” denotes the country to which a foreign bank extends claims either cross-border or through its branches and/or subsidiaries in that country. “Home country” refers to the country of origin of the foreign bank, that is, the country where the bank's headquarters are located.
Previously, the literature on multinational banking focused primarily on the experience of developed countries (especially the United States) with foreign bank entry and on the internationalization of the activities of banks from these countries during the 1970s and 1980s. For example, Goldberg and Saunders (1981a and b); Cho, Krishnan, and Nigh (1987); and Goldberg and Grosse (1994) investigate the factors driving the extent and type of foreign bank presence in the United States, while Fisher and Molyneux (1996) conduct a similar study of foreign bank activities in London. On the other hand, papers such as Goldberg and Saunders (1980); Nigh, Cho, and Krishnan (1986); Goldberg and Johnson (1990); and Buch (2000) examine the operations of German (in the case of the last paper) and U.S. banks abroad.
Van Rijckeghem and Weder (2003) examine a panel of BIS data on flows to 30 emerging markets disaggregated by 11 banking centers, to test the role of bank claims in transmitting currency crises. They find that changes in bank exposures to a crisis country helped predict bank flows in third countries after the Asian crisis, but to a lesser extent during the Mexican 1994 crisis.
For example, international bank claims (cross-border claims and local claims in foreign currency) in 2000 represented more than 55 percent of domestic credit for Argentina and Peru, but they accounted for only 19 percent of domestic credit for Brazil.
The BIS distinguishes among international financial claims directed to the private, public, and banking sectors. Claims on the latter include those on the central bank and on public and private financial institutions. As a result, we study the behavior of claims on the nonbank private sector only.
Our definition of foreign bank claims ignores the local claims in local currencies extended by foreign banks. The BIS does not report data on these statistics with a sectoral breakdown (that is, there is no discrimination between claims held with the private and public sectors). Nevertheless, we feel that the definition of claims used here, which focuses on foreign currency claims, might be more representative of the actual exposure or potential losses that foreign banks could face from their operations in developing countries, since in general it will be harder for countries to repay claims in foreign currency, especially if some of those claims go to individuals or firms that do not receive dollar incomes.
Though the BIS statistics are biannual until 2000 and quarterly thereafter, data availability for the remaining variables in our empirical model leads us to focus on annual, end-of-year changes.
By the end of 2000, claims to the nonbank private sector represented 53 percent of all claims to developing countries and 62 percent of all claims to Latin American countries, with the remaining claims evenly split between the public and banking sectors in those countries.
An example is the recent crisis in Argentina, where domestic and foreign banks were coerced into increasing their exposure to the public sector through debt swaps.
Also, derivative markets on public sector bonds are reasonably liquid, and the BIS data may not control well for such operations. While the same objections may be raised with respect to claims on the private sector, loans tend to be a much higher percentage of the total claims on the private sector.
As a share of claims on developing countries, claims on Latin America reached 40 percent in 2000.
The United Kingdom is the exception, where data on private sector claims are available only for the period 1993–2000.
Alternatively, we could estimate a separate regression for each home (lender) country, using Zellner's Seemingly Unrelated Regressions (SUR), to account for the contemporaneous cross-equation correlation in the error terms. As a robustness check, we estimated separate equations for each lender and compared those results with the results from estimating equation (1). The differences are not significant, and, furthermore, the drawback of the SUR method is that it forces our data into a balanced panel, significantly reducing the number of observations.
Note that while an increase in claims reflects a rise in foreign bank's exposure, it is not necessarily associated solely with new lending to the region. For example, the acquisition of a domestic bank by a foreign bank will lead to a rise in claims (as the loan portfolio of the domestic bank is absorbed by the foreign bank), but it may or may not lead to new lending, depending on the actions of the foreign bank following the acquisition. Nevertheless, based on some rough calculations using the BIS Locational Statistics, we can estimate that more than 70 percent of the international claims to Latin America are in the form of loans. Also, in the robustness tests we try to explicitly control for the impact of mergers and acquisitions.
For example, in modeling the behavior of Canadian claims to Latin America, we allow for Canadian GDP and interest rates to affect changes in these claims, but economic conditions from other home countries are not assumed to enter the regression for Canadian claims.
Institutional Investor magazine publishes a semiannual survey of country credit ratings. The magazine surveys bankers, money managers, and economists around the world on their evaluations of the relative risk of countries to which they lend. On the basis of their responses, the magazine produces a rating from 0 to 100, with higher numbers representing a better repayment capacity. We use end-of-year ratings.
In alternative specifications that are not shown but are available upon request, we replaced the credit risk rating for a number of macro variables (government deficit, current account deficit, and real exchange rate appreciation, among others) that serve as proxies for country risk. Given that results were very similar, we prefer this more parsimonious specification, which allows us to examine interaction effects and positive and negative shocks more easily.
Because the BIS data are denominated in U.S. dollars and exchange rates vis-à-vis the dollar have been volatile in Latin America, one could be concerned that exchange rate movements are disproportionately affecting the measured behavior of foreign bank claims. However, we believe that this should not be a serious issue for two main reasons. First, our analysis focuses on international claims, which include cross-border claims (denominated in any currency) and local claims (that is, those issued by foreign bank subsidiaries and branches) denominated in foreign currency. Thus, since local claims in local currency are not included in our study, the concern that some of the foreign claims that we analyze might have originated in the volatile host country currency is small in our view. This could occur only if some of the cross-border claims were denominated in the local currency, which seems unlikely. Second, while some of the cross-border claims could have originated in a home currency other than the dollar, some rough estimations, using data from the BIS Locational Statistics, indicate that for all countries in our sample, the average share of assets denominated in dollars was close to 80 percent or higher during the sample period we consider.
For example, Chuhan, Claessens, and Mamingi (1998) find credit ratings to have a positive impact on portfolio flows to Asia and Latin America. In turn, Hernandez, Mellado, and Valdes (2001) find host GDP growth to have a similar effect on private capital flows to a larger sample of developing countries.
We also conducted estimations including all regressors contemporaneously and found that our main results do not change. These estimations are available upon request.
Calvo and Mendoza (2000) argue that as investors become more diversified, and hence their average exposures in any particular asset decrease, they have reduced incentives to learn about the fundamentals of each asset, and hence react more strongly to signals on expected return or risk. This suggests that as foreign banks become more exposed to a particular host country, they may react less to changes in host country variables.
Schinasi and Smith (1999) discuss optimal portfolio rebalancing as “contagion” after different types of shocks to expected asset returns and variances.
We do not investigate positive/negative home growth shocks, because for the seven home countries we focus on, there have been virtually no years in which home growth has been negative.
Essentially, the fully unrestricted model is equivalent to estimating a separate equation for each lender/home country, including its corresponding home factors, a matrix of host factors, and a variable capturing changes in claims to other countries. The fully unrestricted model is shown in Table A.2 and the restriction tests are shown in Table A.3.
The finding that only some of the home variables are significant might arise from the fact that these variables tend to be significantly correlated within and across home countries.
This result is robust including both the crisis dummy as well as other regressors contemporaneously rather than lagged. Also, the result holds if we separately control for banking, currency, and twin crises.
These figures, which include the share of loans held by all foreign banks operating in all of Latin America, come from Salomon Smith Barney (2000).
BIS statistics lump together local claims in foreign currency w