Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19

IMF Working Papers, September 16, 2022

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Canonical URL: Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19

Authors: Weijia Yao, Anamika Sen, Juan Yepez
Publication date: September 16, 2022
Publication type: IMF Working Paper
Issue: 188
Series: Working Paper No. 2022/188
Volume: 2022
Pages: 33
DOI: https://doi.org/10.5089/9798400222030.001
Stock No: WPIEA2022188
ISBN: 9798400222030
ISSN: 1018-5941
Subject areas: Bank credit, COVID-19, Credit, Credit ratings, Financial institutions, Foreign banks, Health, Money
Keywords: bank behavior, bank characteristic, Bank credit, bank ownership, bank size, capital, Central America, Central and Eastern Europe, COVID-19, COVID-19., credit, Credit ratings, domestic bank, financial conditions, Foreign banks, Global, liquidity, ownership, ownership data, Policy announcements

Foreign banks exhibited a sharp slowdown in lending by their affiliates relative to domestic banks, consistent with a shock-transmitting role observed in prior episodes of financial distress.
Once the stringency of mobility restrictions is accounted for, foreign banks were found to lend at a higher rate than domestic banks.
Foreign banks’ lending portfolio during the COVID-19 shock was concentrated more in the corporate sector.
Differences in lending rates between foreign and domestic banks can be explained by heterogeneous effects of policy measures enacted in response to the pandemic.
In jurisdictions with more stringent mobility restrictions, policy interventions actually encouraged higher lending by foreign banks.
Overall implication: foreign bank presence may have acted as a shock absorber in jurisdictions where economic activity was most affected by the pandemic.

Comparative lending behavior: foreign-affiliate lending slowed sharply relative to domestic banks, mirroring previous financial-stress episodes.
Interaction with mobility restrictions: accounting for lockdown stringency reverses the apparent shock-transmitting role—foreign banks lend more than domestic banks under stringent mobility constraints.
Sectoral concentration: foreign bank lending skewed toward the corporate sector during the pandemic.
Role of policy measures: heterogeneous policy responses influenced lending behavior; in high-stringency jurisdictions, interventions supported increased foreign-bank lending.

Policymakers should consider the interaction between bank ownership structure and the stringency of mobility restrictions when designing stabilization measures during pandemic-type shocks.
Policy interventions can modify foreign banks’ behavior; in settings with severe mobility restrictions, targeted interventions may leverage foreign-bank presence to support lending to the corporate sector.
Assessment of financial resilience during global shocks should account for cross-border bank characteristics and the local policy environment.

IMF Working Paper — "Shock Absorbers or Transmitters? The Role of Foreign Banks during COVID-19", September 16, 2022.