The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises

The Flight Home Effect: Evidence from the Syndicated Loan Market During Financial Crises

Mariassunta Giannetti, Luc Laeven

Series number :

Serial Number: 
304/2011

Date posted :

May 01 2011

Last revised :

October 29 2018
SSRN Share

Keywords

  • financial crisis • 
  • home bias • 
  • Flight to quality • 
  • syndicated loans

In the context of the global market for syndicated bank loans, we provide evidence that the collapse of international markets during financial crises can in part be explained by a flight home effect. We show that the home bias of lenders’ loan origination increases by approximately 20 percent if the bank’s country of origin experiences a banking crisis.

This flight home effect is distinct from a flight to quality effect because borrowers of different quality (or from countries with different degree of investor protection) are similarly affected by lenders rebalancing their loan portfolios in favor of domestic borrowers. Banks with less stable funding sources and larger losses, being more vulnerable to liquidity shocks, exhibit a stronger flight home effect. Overall, the results indicate that the home bias of international capital allocation tends to increase in the presence of adverse economic shocks affecting the net wealth of international investors. We provide evidence suggesting that the degree of proximity to the domestic market affects the perceived risk and expected returns of banks experiencing negative shocks.

Published in

Published in: 
Publication Title: 
Journal of Financial Economics
Description: 
Volume 104, Issue 1, April 2012, Pages 23-43

Authors

Real name: 
Research Member
Research European Central Bank