Loans from My Neighbors: East Asian Commercial Banks, Banking Integration, and Bank Default Risk

Publication | April 2020
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Banking integration lowers bank default risk in recipient countries.

We investigate the impact of banking integration on recipient country bank default risk and, in particular, whether the type of banking integration moderates that relationship. Using the system generalized method of moments, we found that banking integration lowers bank default risk in recipient countries. The foreign claims that Asian lenders extend and the foreign claims that banks extend via local affiliates primarily drive the impact. These results show that the close proximity of lenders and borrowers or “local” knowledge via an affiliate’s presence alleviates information asymmetry, allowing for effective monitoring and disciplining of the loan relationship. The result supports the fostering of banking integration, promoting deeper intra-regional connectedness throughout East Asia. Where foreign claims come from outside East Asia, policy makers should encourage their presence through local affiliates, as this has an equivalent impact.

WORKING PAPER NO: 1113

Additional Details

Authors
Type
Series
Subjects
  • Finance sector development
Countries/Economies
  • China, People's Republic of
  • Hong Kong, China
  • Indonesia
  • Korea, Republic of
  • Malaysia
  • Philippines
  • Singapore
  • Thailand