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Financial Globalization and the Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its impact on Peru. I find that after the shock international banks reduce bank-to-bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically-owned banks that borrow internationally, intermediate for foreign-owned banks, and weakest for locally-funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that bank-to-bank lending establishes an international transmission channel for liquidity shocks and that foreign bank ownership mitigates, rather than amplifies, the transmission through this channel.