Do Foreign-Owned Banks Affect Banking System Liquidity Risk?

Abstract

Existing empirical research shows that foreign owned banks play a stabilizing role in emerging economies' banking systems. Anecdotal evidence suggests that this stabilizing role can be attributed to transnational banks' access to more diversified sources of liquidity. There exists, however, no empirical evidence so far on transnational banks' liquidity behavior and its effect on aggregate banking system liquidity. This paper aims at closing this gap. First, we look at the liquid assets holdings of transnational banks and show that in "normal" times they are significantly lower but in crises times higher than those of single-market banks. Second, we find evidence that transnational banks' presence significantly reduces the risk of aggregate liquidity shortages in emerging economies.

Keywords: foreign bank ownership, financial market integration, liquid assets, bank liquidity crises

JEL Classification: G21, E49