Foreign‐funded credit: Funding the credit cycle?

Abstract

This study investigates what drives the credit cycle, focusing on the role of foreign-funded bank credit (FFC). Considering credit cycles in 41 countries over the period 1985-2015, this study finds that credit booms are associated with an increase in the share of FFC in an economy. This especially holds for emerging economies and for credit provided to nonfinancial corporations. The increased credit needs during a boom may cause the substitution of domestically funded credit by FFC, as the growth in FFC is less restricted than domestically funded credit, such as the domestic deposit base.