BIS: local lending drivers in the banking market

Set 27 2018

The Bank for International Settlement (BIS) published an extended report aimed at assessing which factors can determine local lending by banks’ foreign subsidiaries. The literature on the behaviour of global banks has focused mainly on cross-border. It is however interesting to explore the local lending market to assess the role of banks in the development of local business and, more generally, in the well-being of households in the country. The distinction between global and local lending is important for two reasons. First, local lending is much more stable, growing more slowly during expansions and shrinking less sharply during bad times. Second, local lending has grown much more important over the past two decades.

Namely, the report compares the importance of factors that are specific to the host country with those that are specific to a bank’s owner. Tthe impact of host-specific factors is estimated by comparing the lending behaviour of subsidiaries that are located in different countries but have the same parent. The impact of owner-specific factors is instead estimated by comparing the lending behaviour of subsidiaries that are located in the same country but have different parents.

The inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, ownership structures are identified and incorporated into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending.

Results show that host-specific factors tend to influence local lending by global banks more strongly than owner-specific factors do. Specifically, the state of the host country’s economy and the financial health of local subsidiaries are more important than the macroeconomic conditions in parent countries and the financial condition of a bank’s parent company. The lending behaviour of global banks’ subsidiaries throughout the world is thus more closely related to local macroeconomic conditions and their financial conditions than to those of their owner-specific counterparts.


BIS: What drives local lending by global banks? (PDF)


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