Global Banks' Spillovers to Emerging Markets: Macro to Micro Transmission

TL;DR

This paper investigates how shocks to global banks' net worth affect emerging markets by analyzing high-frequency credit supply surprises, revealing impacts on currencies, borrowing costs, capital flows, and economic activity.

Contribution

It introduces a novel identification strategy to isolate high-frequency bank credit shocks and examines their macroeconomic and microeconomic effects in emerging markets.

Findings

Positive shocks appreciate local currencies

Lower external borrowing costs and increased capital flows

Stronger effects for better capitalized banks and less leveraged firms

Abstract

This paper studies how shocks to global banks' net worth transmit to Emerging Market Economies. Using the identification strategy of Ottonello and Song (2022), which isolates high-frequency surprises to banks' credit supply capacity, we show that positive shocks appreciate local currencies, lower external borrowing costs, increase capital flows to domestic banking sectors, and raise investment, credit, and real activity across EMEs. These effects are highly robust across specifications and samples. Using administrative credit-registry data from Uruguay, we find that better capitalized banks transmit global credit easing more strongly. At the firm level, responses are weaker for more leveraged firms, especially those with foreign-currency debt, short maturities, or collateral not priced to market.