_operating in distinct host economies_ , which is simultaneously consistent with a short elapsed time since the prior crisis.

One possible concern regarding the quality of the instruments is that the elapsed time from the previous crisis may simply reflect the fact that banks from those countries may have had less time to recover from the crisis-related shock, and so the instruments are capturing not so much a learning effect, but a sluggish mean reversion process for macroeconomic or institutional factors (which would violate the exclusion restriction). While this _may_ be possible, there are reasons why we are skeptical that this is the case.

First, if we were using only one instrument corresponding to the elapsed time from the most recent crisis, such a possibility could in fact be true. However, given our instrument set that includes recency of an entire _suite_ of crises, this outcome is far more unlikely. Indeed, in some cases any given instrument includes a span of as many as 10 years—hardly reason to believe that the economy is still licking its wounds, or that the effects from the previous crisis would not have been fully incorporated into agents’ decisionmaking.

Second, it is helpful to recall that our sample comprises subsidiaries of banks located in host countries distinct from their parents’ home economies. There is both theoretical reason to believe,<sup>20</sup> and empirical evidence to support, the fact that subsidiaries operate primarily in response to economic conditions in their local markets (Brealey & Kaplanis 1996; Focarelli & Pozzolo 2000), rather than those of their parent banks. Consequently, the history of crises on the home country would likely have a minor impact, if any, on the _contemporary_ balance sheet of these subsidiaries (indeed, they may have not even been established at the time of the previous crisis), and it is even less likely that _home_ crisis effects could have transmitted via the other home-country actions (such as expansionary monetary policy or banking sector reform, which would likely have fairly limited effects on lending conditions in the host country).

Third, and perhaps most importantly, slow mean reversion would imply that the correlation between our instruments and observable measures of macroeconomic and bank performance, such as GDP growth or returns on assets, will be positive. However, cross-correlations between the instruments and such performance variables indicate that no such systematic relationship exists, with correlations entering with low values and mixed signs (available on request).

We also attempt to limit the possibility that the crisis event may not be exogenous by considering only foreign subsidiaries of international banks operating in developing countries. Since the epicenter of the 2007/08 financial crisis was the banking sector of high-income economies, the crisis was—from the perspective of developing countries—effectively an exogenous event “imported” from high-income ones, and unlikely to have been caused by the foreign banks in question. Restricting our working dataset to _only_ foreign-owned banks further ensures that the analysis is performed against the appropriate counterfactual conditional, since an extensive literature has established that domestic and foreign banks differ in systematic ways (see, for example, the review by Clarke, Cull, Mart ́ınez Per ́ıa & S ́anchez (2003)).

> 20Since most lending activity of subsidiaries would occur in a bank’s host economy, profit-maximizing banks are unlikely to be able to sustain prolonged repatriation of liquidity, irrespective of local financing demands.

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