Do foreign-owned banks affect banking system liquidity risk?

Existing empirical research shows that foreign-owned banks play a stabilizing role in emerging economies' banking systems. Anecdotal evidence suggests that this stabilizing role call be attributed to transnational banks' access to more diversified sources of liquidity. There exists, however, no empirical evidence so far on transnational banks' liquidity behavior and its effect oil aggregate banking system liquidity. This paper aims at closing this gap. First, we look at the liquid assets holdings of transnational banks and show that in "normal" times they are significantly lower but in crises times higher than those of single-market banks. Second, we find evidence that transnational banks' presence significantly reduces the risk of aggregate liquidity shortages in emerging economies. Journal of Comparative Economics 37 (4) (2009) 647-657. University of Bonn, Lennestr. 37, 53113 Bonn, Germany. (C) 2009 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.