German Bank Lending During Emerging Market Crises: A Bank Level Analysis

Abstract

This paper studies German bank lending during the Asian and Russian crises, using a bank level data set, which has been compiled from credit data at the Deutsche Bundesbank. Our aim is to gain more insight into the pattern of German bank lending during financial crises in emerging markets. We find that German banks reacted to the Asian crisis mainly by reallocating their portfolios among emerging markets. This behaviour is consistent with active portfolio management and does not necessarily indicate a spontaneous reaction to the Asian crisis. By contrast, the banks' behaviour during the Russian crisis is characterised by a general withdrawal from emerging markets. The use of micro data allows us to analyse and to model bank heterogeneity with panel estimation techniques. We find that the lending of large commercial banks was less stable than the lending of public sector banks during the Asian crisis. Differences were not as pronounced during the Russian crisis.

The determinants of cross‐border bank flows to emerging markets

“…Heid et al . () confirmed such effects at the micro level: a sudden increase in risk aversion played a fundamental role in explaining cross‐border lending by German banks. Similarly, Kaminski et al .…”

What Drives Portfolio Investments of German Banks in Emerging Capital Markets?

“…Additionally, the time phenomenon at the turn of the year 2004/2005 might also be explainable by the changing legal framework and the risk aversion of German land banks' shareholders in 2005. Heid/Nestmann/Weder/vonWesternhagen (2007) found differences between land banks' and large commercial banks' lending behaviour towards emerging markets and it should be remembered that the government guarantee of the maintenance obligation "Anstaltslast" and the guarantee obligation "Gewährträgerhaftung" for land banks was rescinded in 2005, following a decision of the EU commission. This decreased governmental guarantee might have resulted in lands banks disinvesting in risky assets, such as portfolio investments in ECMs, and explain the highly important significantly negative coefficients for the time dummies during the first half of 2005.…”