Shocks Abroad, Pain at Home? Bank-Firm-Level Evidence on the International Transmission of Financial Shocks

Authors: Steven Ongena, José-Luis Peydró and Neeltje van Horen

IMF Economic Review, Vol. 63, No 4, 698-750, November, 2015

The paper studies the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, it uses matched bank-firm-level data, covering mainly small and medium-sized firms in Eastern Europe and Turkey, and exploits the Lehman failure. The paper finds that internationally borrowing domestic and especially foreign owned banks contract their credit more during the crisis than locally funded domestic banks do. Firms dependent on credit and with a relationship with internationally borrowing domestic or foreign banks suffer more in their financing and real performance, especially when single-bank, small or with limited tangible assets. Moreover, firms in countries with lower financial development, more reliance on foreign funding and slower contract enforcement are more affected. Overall the results suggest the existence of spillovers to the real sector through an international banking channel but with heterogeneous effects across firms and countries.