Crisis-Time Lending Patterns: What Drives U.S. Banks' International Loans During Financial Crises? A Vector Autoregressive Analysis

Abstract

This thesis poses two initial questions: 1) Have there been discrepancies in reactions from American private banks to six of the most notable financial crises of the past three decades, and 2) if differences are shown to have existed, what drove them? Put simply, this paper investigates whether there has been variation in responses to foreign financial crises, and if so, why. A fixed-effects event study is estimated to first show how U.S. banks have reacted to the six crises in the sample. A Vector Autoregressive (VAR) model is then used to determine which type of country-specific economic variables and risk indicators are most closely related to levels of American private lending in each country and region. The main findings of this paper are, first, that there have been significant discrepancies in the reactions from American banks to the six financial crises in the sample. Second, it is shown that the factors most closely connected to lending levels from American banks vary across regions, and that when the nature of the factors is mostly political, financial crises have resulted in less severe reactions from U.S. banks than when loans are most closely tied to economic and financial factors. Additionally, it is demonstrated that American banks have not only been reactionary to the six crises in the study, but that changes in levels of U.S. bank loans have affected underlying risk profiles in borrowing regions.