Two essays on financial crisis and banking

This dissertation asks two empirical questions : How did financial development affect the performance of European firms before and after the 2008 Credit Crisis, and do foreign bank affiliates cut their lending more than the domestic banks in a financial crisis.;Chapter 2 studies the impact of the recent credit crisis on firm performance. The recent credit crisis led to a deep recession in the U.S. and the rest of the world. This chapter seeks to identify the significant relationship between financial development and firm-level performance in advanced European economies based on the recent credit crisis. To evaluate firm-level performance, it includes cross-country differences in financial development and cross-firm differences in dependence on external financing, and study how financial development interacts with firm dependence on external financing. The results show that financial development is positively related to a firm's earnings in tranquil times. Surprisingly, however, that same financial development can also exacerbate the impact of a crisis. The results are robust to estimation using various instruments for the endogenous variables, and are statistically significant across different specifications.;Chapter 3 studies the impact of the recent credit crisis on bank lending. It contributes to the literature on the international transmission of balance sheet shocks that pummeled the banks of the industrialized countries in 2008 and 2009. It examines over time bank level data on 250,000 banks located around the world. Our identification strategy relies on the differential responses of foreign and domestic banks to the post-Lehman 2008 crisis. If in a particular market, say in Korea, a foreign-affiliated bank's (Citibank, Korea's) lending falls by more than a domestic bank's (Kookmin's) lending, then we attribute this additional decline to the tightening of the foreign affiliates internal capital market at its headquarters. We control for the decline in market conditions common to all banks in a particular region by the decline in lending by the banks other than the foreign affiliated bank. We find evidence that internal capital markets do indeed affect cross-border lending. In particular, European bank affiliates in Latin America and Asia cut their lending by more than the domestic banks located in these regions.