# **1 Introduction**

The history of modern economies is a history of financial crises. While the global crisis of 2007/08 distinguished itself in part due to its origin in the advanced economies, financial crises in the highincome countries of today were in fact fairly commonplace throughout the 19th and 20th centuries: Reinhart & Rogoff (2009) document no less than 2,678 separate domestic financial crises on a yearly basis in the 47 countries for which data are available between 1800 and 2005. From the Panic of 1857 to Black Tuesday in 1929 that marked the onset of the Great Depression, these crises undoubtedly shaped the economic fortunes of the economies in which they occurred. But how does a history of crises shape the post-crisis behavior of international banks today?

Although the recent crisis was certainly unique in some ways, one key feature of the recent crisis—the run on financial assets whose values had become uncertain, leading to a collapse in valuations and widespread contagion—was in fact distressingly pedestrian (Bernanke 2013; Brunnermeier 2009; Gorton & Metrick 2012). To the extent that this meant that banks undergoing the crisis could draw on their stock of experience with previous crises, such “experienced” banks may engage in distinctly different post-crisis behavior, as compared to banks that do not possess such histories. The accumulated experience is particularly important for the recent crisis, which was marked by exceptional uncertainty over conditions in the real economy.

In this paper, we apply the lens of learning to the question of banking responses to a financial crisis, such as the recent 2007/08 crisis. Specifically, we draw on data from foreign subsidiaries of international banks and ask whether banks based in home economies with richer crisis histories display lending patterns over the 2007/08 crisis that differed from other foreign banks. Due to increases in informational asymmetries following crises, banks tend to ration credit (Stiglitz & Weiss 1981). Such hoarding of lending could well be optimal from the point of view of shoring up liquidity and strengthening balance sheets (Bernanke 1983; Bernanke & Blinder 1992; Uchida 2003), or navigating heightened uncertainty surrounding borrowers’ credit quality (Bernanke & Gertler 1989; Bernanke, Gertler & Gilchrist 1996). Banks that learn from their previous crisis experiences would therefore be more circumspect about expanding their loan portfolios, especially in the aftermath of a crisis.<sup>1</sup> Naturally, our investigation is complicated by the fact that banks owned by crisis-prone home countries may well be systematically different from those owned by countries without such histories. If such differences were both observable and measurable, it would be a straightforward exercise to address the problem by the inclusion of the relevant intervening variable(s). In the absence of such controls, however, it becomes impossible to disentangle the crisis learning effect from other sources of unobserved heterogeneity. We address this fundamental endogeneity problem by exploiting the fact that the stock of financial crisis experiences not only varied between home countries, but the _recency_ of crises also differed. Inspired by the behavioral economics literature (in particular

> 1It is also theoretically possible that banks with more crisis experience choose to _expand_ lending following a crisis, perhaps because they have learned how to better cope with crises and hence seek to capture market share. The question of whether experienced banks lend more or less in a post-crisis environment is ultimately an empirical one, although the theoretical literature leans toward reductions in lending as optimal responses.

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