Determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries

Abstract

This paper focuses on the transmission of bank liquidity shocks in Loan and deposit in emerging markets. First, we attempt to identify the factors that affect the credit strategy of foreign banks in emerging countries. Second, we test whether depositors do exert market discipline on foreign subsidiaries. Combining between financial variables of subsidiaries, their parent banks, and macroeconomic variables of host and home countries, we investigate the factors that are likely to impact the depositors' behaviour. Our empirical approach is based on a Partial Least Squares-Path model, through which we can identify the causal relationships between the various groups of variables. Our results show that foreign bank lending is determined by the specific financial variables of the parent bank as well as macroeconomic variables of the country of origin. This means that the foreign subsidiary's strategy credit is centrally managed at the parent bank and that subsidiaries' credit supply depends primarily on the financial situation of its parent bank. Finally, we evidence market discipline as applied to foreign subsidiaries in emerging countries. We demonstrate that market discipline is strongly affected by the specific characteristics of the subsidiary.