BIS Working Papers | No 801 | 31 July 2019 by Paola Morales, Daniel Osorio and Juan Sebastian Lemus-Esquivel PDF full text (692kb) | 34 pages Focus This paper asks how the expansion of Colombian banks overseas affects the strength of the credit channel in Colombia (i.e., how monetary policy influences bank balance sheets). We investigate the effect of Colombian banks' acquisitions in foreign jurisdictions, mainly in Central American countries, as this is the most important structural change in the Colombian banking system in recent years. Contribution The paper contributes
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This paper asks how the expansion of Colombian banks overseas affects the strength of the credit channel in Colombia (i.e., how monetary policy influences bank balance sheets). We investigate the effect of Colombian banks' acquisitions in foreign jurisdictions, mainly in Central American countries, as this is the most important structural change in the Colombian banking system in recent years.
The paper contributes to the growing literature that analyses the effect of internationalization on banks, particularly in their loan supply and funding structure. To the best of our knowledge, our paper is the first to look at the influence of Colombian banks' internationalization on 1) the power of monetary policy at the domestic level, 2) banks' balance sheet's credit risk materialization, and 3) the funding structure of banks (that is, their preferences for local funding or for external sources of funds). As our case of study is Colombia, the paper can serve as a guideline for other emerging economies, mainly those based on the traditional deposit-taking and lending schemes.
Through time, we find that Colombian banks with greater financial soundness tended to increase their loan supply, especially in periods of monetary policy tightening. This result is consistent with the widespread belief that healthier intermediaries are more likely to increase the amount of credit available in the economy. Furthermore, results also suggest that international banks (that is, banks that actively operate overseas) reduce their loan supply and charge higher interest rates in times of monetary policy tightening. Moreover, our results suggest that larger international banks with greater loan-loss provisions increase their loan supply, and simultaneously the cost of credit (that is, the interest rate they charge to their debtors). In addition, international banks with strong balance sheets that rely more on short-term funding tend to reduce their loan supply and at the same time lower the cost of credit.
This paper analyses the extent to which the strength of the credit channel is affected by the expansion of domestic banks abroad, widely considered the most important structural change of Colombia banking system in recent years. Using loan-level quarterly data for the period between 2007 and 2016, we estimate panel specifications that relate changes in the loan amount and the loan interest rates to variations on the domestic policy rate, the number of foreign subordinates of the lender bank and the interaction between the two. The results suggest that the response of international banks (i.e., those that have significantly expanded abroad) in the face of changes to the domestic policy rate is not statistically different to that of purely local banks, while the cost of credit is found to be slightly higher. Even though in principle this could be interpreted to the effect that internationalization has had no significant effect on the potency of the credit channel, the results tend towards a more subtle conclusion. Specifically, in the face of increases in the domestic policy rate, international banks tend to switch more strongly from domestic to foreign sources of funding. Purely local banks are able thus to capture relatively more domestic funding under these conditions, which allows their credit activity to respond to monetary policy on a similar scale to that of international banks. This result supports the idea that banks switch funding activities between their operating jurisdictions depending on monetary policy conditions, and that the internationalization of domestic banks plays a cushioning role for the economy at times when the monetary policy stance changes significantly.
JEL codes: E43, E52, F23, F34, F44
Keywords: bank-lending channel, internationalization of banks, banks' business models, branches and subsidiaries