Transmission of a global financial crisis shock to an emerging economy

Abstract

Using a unique dataset consisting of all corporate loans in Pakistan, we study the impact of the global financial crisis (GFC) on the lending ability of its banking sector. We also take into account various bank and loan types along with extensive margins, firm size effects, and impact of information asymmetry. Our findings show that the Pakistani banking sector was indeed affected by the GFC as high exposure banks, who borrow relatively more internationally, reduce lending to local firms and this impact is larger for small firms. We also find differences in the lending ability of various bank types and loan types. By using direct information asymmetry measure, we find that banks reduced lending after the global financial crisis shock. However, the information gathered from the previous relationship of the borrower with relatively low exposure banks can overcome the negative financial shock and increase lending after the shock. These findings are very relevant in the context of the spillover effects of the GFC and have important policy implications for emerging markets.