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Abstract

In this dissertation, “Banking Globalization and Cross-border Capital Flow in EMEs”, which consists of five chapters, I study how banking sector globalization can generate profound real impact on emerging market economy in an increasingly inter-connected world. Specifically, I investigate the question through the lens of financial contracting between banks that channel foreign credit into emerging market economies. In Chapter 1, I provide an overview of the big-picture question and the motivation of the whole dissertation. The dissertation is motivated by two categories of facts: (1) a series of demographic changes in the cross-border bank credit between EME's and the center economy, primarily the significant replacement of foreign banks by EMEs' domestic banks in the channeling of cross-border credit; (2) the increasing interconnection between EME and the rest of the world, reflected in firms' and banks' balance sheets, financing conditions, asset prices, etc. In Chapter 2, I investigate the origin of the rise of the domestic banks in the international financing market. Through investigating multiple pieces of data sets, I found that the rise of domestic banks from EME's first initiated from the beginning of 1990s. And the common driving force for this change was shadow banking institutions' expansion in the U.S.. Before 1990s, over 90\% of the cross-border loans were directly channeled by foreign banks from developed world; after 1990, over 35\% of the USD denominated loans were lent by EMEs' domestic banks. In Chapter 3, I provide empirical evidence that domestic banks and foreign banks display different lending technologies when facing EME borrowers. The difference lies at the range of collateral assets that they can accept when signing credit contracts. While foreign banks rarely accept physical/tangible assets as collateral, domestic banks, on the other hand, are much more flexible with the type of assets to be pledged as collateral. In the micro-level data, I discovered the sorting pattern of domestic and foreign banks into loan tranches with different assets as collateral. Within the same borrower and the same loan deal, a 10\% increase in foreign banks' holding of the face value is associated with 28\% less likely that this tranche is secured by any form of physical collateral. Chapter 4 mainly documents the real aggregate consequences of the rise of domestic banks in EME's and the real impact of their broader contracting space compared with their predecessor -- foreign banks. I found that since the rise of domestic banks in the cross-border financing market, emerging market economies had seen higher proportions of cross-border loans been contracted to firms in high tangibility sectors; overtime, EMEs' high tangibility industries' started to grow faster relative to low tangibility sector; and what's more, the high tangibility industries had become more susceptible to changes in financial conditions in the U.S.. In Chapter 5 of my dissertation, I propose and identify a novel channel -- domestic-bank channeled foreign credit-- through which global financial cycles are mapped into local financial cycles. I exploit a unique cross-city heterogeneity of domestic global bank distribution in China. This is unique, because in China, there's only one domestic bank, BOC, that can channel foreign credit due to historical and institutional reasons. And BOC's local presence is heterogeneous across different cities. My empirical findings show that the enlarged flexibility in cross-border credit contracting, which is made possible by the rise of domestic global banks in EMEs, is a mixed blessing to these economies: It allows the hot money flowing to EMEs to be more efficiently allocated, but may lead to less efficient allocation of domestic credit when hot money leaves. Specifically, we find that cities with high pre-cycle BOC exposure saw higher volume of credit being channeled to young firms with high TFP growth and high job creation rate; but it is precisely these cities that also saw much higher credit accumulation based on local commercial and industrial land. The high land-collateralized borrowing pushed up land prices and spilled over to buoyant domestic credit intermediation in the booming phase, but also led to collateral value loss when hot money was suddenly leaving, which severely impaired domestic credit intermediation in the tightening phase. Echoing the results of the first two essays, the empirical finding in these two essays illustrates a similar point: under certain environments, increasing the contingency in certain dimension of the contracting space could be a mixed blessing.

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