Foreign bank lending during a crisis: The impact of financial regulations

This study examines foreign bank lending during crises by using data on 1,558 individual banks in Asian and Latin American countries during the period 1987-2013. Our results reveal that, in a crisis period, Asian banks with a higher level of foreign ownership tend to reduce their lending. Nevertheless, during crises banks consistently increase their lending in order to support their borrowers; in fact, in Latin America, crises stimulate foreign banks to lend more. Our evidence on lending during a crisis supports credit rationing theories with a flight to quality. The international substitution effect also holds based on our results. Taking financial structures and regulation into consideration, for banks with more foreign ownership in a highly concentrated financial system in Asia, the crisis has less effect on a cut in lending, while it has a greater effect on cuts in lending for countries with a higher level of government-owned assets. This paper contributes to the existing literature on the bank lending channel and provides implications for policymakers.