Foreign bank presence: Helping or hurting when financial contagion strikes?

- Debt financed by foreign banks may increase the effects of contagion shocks.
- The impact differs with the structure of the banking sector in borrowing countries.
- We estimate bilateral models of bank flows over the 1983-2011 period.
- Bank flows towards domestic banks and firms decrease during contagion shocks.
- Bank flows towards foreign-controlled banks appear less vulnerable.

The spreading of the 2007-09 global financial crisis has highlighted the need to increase the resilience of the financial sector to contagion shocks. Debt financed by foreign banks has been found to increase the financial fragility of the borrowing country in situations of financial contagion, but effects could differ with the structure of the banking sector in the borrowing country. Using bilateral bank flows over the 1983-2011 period, we show that external bank flows towards foreign-controlled banks have been more stable than flows towards domestically-owned banks and firms during financial contagion shocks.