The Role of Islamic Banks Subsidiaries in the Transmission of Liquidity Shocks across Countries

This paper studies the international transmission of bank liquidity shocks from multinational Islamic bank-holding companies to their subsidiaries. Based on a total sample of 120 Islamic and conventional bank subsidiaries, we test whether foreign bank lending is determined by different factors for Islamic and conventional banks. We estimate a model that includes subsidiary and parent bank characteristics as well as host and home country variables. Our empirical findings show that conventional parent bank fragility negatively affects lending by their subsidiaries. Nevertheless, we show that the parent Islamic bank does not significantly affect lending by subsidiaries. Finally, we examine the existence of market discipline in relation to the transmission of liquidity shocks. We further find that reduction in foreign Islamic bank lending is stronger for those that are dependent on the interbank market. We find that the depositors react to a deterioration of bank performance and punish their institutions by withdrawing money. We show that market discipline plays a more important role for Islamic banks whereas liquidity needs determine the change in for conventional banks. © Authors