The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia

This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy in the region act as transmission channels for this effect. We show that affiliates of foreign banks play a relatively more important role to channel these regional effects than domestic banks. Finally, regulators can manage this exposure through macroprudential policy, selective capital controls and floating currency regimes.