Financial Crisis Transmission: Foreign Ownership vs. Foreign Funding?

We investigate whether the credit contraction that followed the global financial crisis is due to high foreign bank ownership or high reliance of banks on foreign funding. We apply panel vector auto-regressions to quarterly data for 41 countries, about 11 years, and find that domestic credit growth is highly sensitive to cross-border funding shocks around the world. However, high foreign ownership per se does not appear to increase the sensitivity of credit to foreign funding shocks. Rather, the sensitivity is higher in countries with high reliance on foreign funding and high loan-to-deposit ratios. These findings have important policy implications for many countries involved in cross-border finance.