Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession - Federal Reserve Bank of New York

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Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession

2014 February 2012 Number 545

JEL classification: E44, F36, G32

Authors: Nicola Cetorelli and Linda S. Goldberg

Foreign banks pulled significant funding from their U.S. branches during the Great Recession. We estimate that the average-sized branch experienced a 12 percent net internal fund “withdrawal,” with the fund transfer disproportionately bigger for larger branches. This internal shock to the balance sheets of U.S. branches of foreign banks had sizable effects on their lending. On average, for each dollar of funds transferred internally to the parent, branches decreased lending supply by about forty to fifty cents. However, the extent of the lending effects was very different across branches, depending on their precrisis modes of operation in the United States.

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