Funding shocks and banks' credit reallocation

Steven Ongena, Olivier De Jonghe, Hans Dewachter, Klaas Mulier, Glenn Schepens
What considerations motivate credit reallocation following funding shocks and financial crises? New research reveals three elements that drive the nature and timing of the restructuring of domestic credit portfolios. The collapse of Lehman Brothers in September 2008 was an unprecedented shock to Western banks' funding opportunities and the academic literature shows that banks transmitted this funding shock to both their domestic and their foreign borrowers. However, recent evidence also
more » ... that banks do not curtail credit equally across the board. Research shows that global banks, for example, rebalance their portfolios in favor of their domestic borrowers to the detriment of their foreign borrowers when hit by a banking crisis in their home country and that-during the recent crisisbanks cut back in particular on their operations in foreign countries that are more distant from their headquarters. These findings thus indicate that there is significant heterogeneity in the reallocation decisions of banks, both between their foreign and domestic credit portfolios and within their foreign credit portfolios.
doi:10.5167/uzh-130995 fatcat:oqibvt766fbdfc6yoekmnec4w4