Seminar 281: International Trade and Finance, "Title: "Credit Allocation under Banking Globalization: Theory and Empirics"

Seminar | September 18 | 4-5:30 p.m. | 597 Evans Hall

 Leslie Shen, UC Berkeley

 Department of Economics

This paper studies how the globalization of banking affects credit allocation across firms. I develop a model of global and local banking where each type of bank faces a problem of asymmetric information: global banks have the technology to extract global but not local information; local banks have the technology to extract local but not global information. The model shows that this double information asymmetry problem creates a segmented credit market affected by adverse selection. Firms with a higher return due to global risk relative to local risk select into borrowing from global banks; firms with a higher return due to local risk relative to global risk select into borrowing from local banks. The model further demonstrates that, when one of the banks faces a funding shock, the adverse selection problem induces firms in the middle range of the distribution on the relative return due to global versus local risk to switch banks, and has the potential to generate spillover and amplification effects. I test the model using a cross-country loan-level dataset matched with firm balance sheet data. I find firm-bank sorting patterns and evidence on firm switching behavior during the European sovereign debt crisis that support the model predictions.