Multinational Banks and the Drivers of Cross-Border Contagion

In this paper, we investigate the drivers of transmission of solvency and wholesale funding shocks to 84 OECD parent banks on the lending of 375 foreign subsidiaries. We find evidence for the transmission of both types of shocks. Parent undercapitalization affects the transmission of solvency shocks, while wholesale shocks transmit to subsidiaries of parents that rely primarily on wholesale funding. We further document that parent banks tend to guard investment markets at the expense of funding markets and to channel any excess liquidity to improve lending growth in lagging markets. These results have important theoretical and policy implications and add to our understanding of the transmission of solvency and wholesale shocks across borders.