Do foreign-owned banks affect banking system liquidity risk

Foreign owned banks are shown to play a stabilizing role in emerging economies ’ banking systems. Anecdotal evidence suggests that this stabilizing role can be attributed to transnational banks ’ access to more diversified sources of liquidity. There is, however, no empirical evidence, so far, that transnational banks ’ liquidity behavior differs from that of single-market banks. This paper aims at closing this gap. We, first, look at the liquid assets holdings of transnational banks and show that they are significantly lower than those of single-market banks. Second, we are able to document that foreign bank presence significantly reduces the risk of aggregate liquidity shortages in emerging economies