Working Paper

Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission

Abstract: This paper proposes a "double adverse selection channel" of international transmission. It shows, theoretically and empirically, that financial systems with both global and local banks exhibit double adverse selection in credit allocation across firms. Global (local) banks have a comparative advantage in extracting information on global (local) risk, and this double information asymmetry creates a segmented credit market where each bank lends to the worst firms in terms of the unobserved risk factor. Given a bank funding (e.g., monetary policy) shock, double adverse selection affects firm financing at the extensive and price margins, generating spillover and amplification effects across countries.

Keywords: Adverse selection; Global banking; Information asymmetry; International transmission; Monetary policy;

JEL Classification: G21; F30;

https://doi.org/10.17016/IFDP.2021.1325

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2021-08-10

Number: 1325