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

2025-11-30

AI Summary

This paper investigates the transmission mechanism of global banks’ net worth shocks to emerging market economies. Employing Ottonello and Song’s (2022) identification strategy, it constructs a macro–micro matched empirical framework using high-frequency financial data and administrative credit registry data from Uruguay to precisely identify exogenous variations in global bank credit supply. The study finds that positive net worth shocks significantly boost investment and credit expansion in emerging markets while reducing external financing costs. Transmission exhibits substantial heterogeneity: well-capitalized banks respond more strongly in lending, and firms with lower leverage, less foreign-currency debt, and higher-quality collateral experience greater financing improvements. Crucially, this is the first study to document, at the firm level, how leverage structure, currency mismatch, and collateral constraints jointly moderate spillovers from the international financial cycle. The findings provide novel micro-level evidence on the central role of global financial intermediaries in driving emerging market volatility.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Data Mining & Knowledge Management: Linked Open Data, Knowledge Graphs & KB Completion

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Security and Privacy: Data transparency and provenance
• Social Networks and Social Media: Applications and emergent phenomena

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.

Problem

• Analyzes global bank shocks' impact on emerging markets
• Examines transmission through currency, borrowing costs, and capital flows
• Investigates firm-level responses based on leverage and debt structure

Innovation

• High-frequency credit supply shocks identification
• Administrative credit registry data analysis
• Capitalization and leverage differential transmission effects