nep-ban New Economics Papers
on Banking
Issue of 2020‒11‒16
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Liquidity, Interbank Network Topology and Bank Capital By Aref Ardekani
  2. Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures By Bedayo, Mikel; Jiménez, Gabriel; Peydró, José-Luis; Vegas, Raquel
  3. How Important Is Moral Hazard for Distressed Banks? By Ben-David, Itzhak; Palvia, Ajay A.; Stulz, Rene M.
  4. Granular Credit Risk By Sigurd Galaasen; Rustam Jamilov; Ragnar Juelsrud; Hélène Rey
  5. Shadow Banking, Capital Requirements and Monetary Policy By Fatih Tuluk
  6. Impact of a policy rate cut on bank profitability and financial stability By Hwang, Sunjoo
  7. Recapitalization, Bailout, and Long-run Welfare in a Dynamic Model of Banking By Andrea Modena
  8. Judicial Efficiency and Lending Quality By Vincenzo D'Apice; Franco Fiordelisi; Giovanni W. Puopolo
  9. Machine learning in credit risk: measuring the dilemma between prediction and supervisory cost By Andrés Alonso; José Manuel Carbó
  10. Reliability and security at the dawn of electronic bank transfers in the 1970s-1980s By Maixe-Altes, J. Carles
  11. The Single Supervisory Mechanism and its implications for the profitability of European Banks By Ioanna Avgeri; Yiannis Dendramis; Helen Louri
  12. Bank Credit and Market-based Finance for Corporations: The Effects of Minibond Issuances By Steven Ongena; Sara Pinoli; Paola Rossi; Alessandro Scopelliti Author-Workplace-European Central Bank (ECB) - Directorate General Economics; University of Zurich - Department of Banking and Finance
  13. When green meets green By Hans Degryse; Roman Goncharenko; Carola Theunisz; Tamas Vadasz
  14. Mergers, branch consolidation and financial exclusion in the US bank market By Joan Calzada; Xavier Fageda; Fernando Martínez-Santos
  15. Real effects of lending-based crowdfunding platforms on the SMEs By Olena Havrylchk; Aref Mahdavi Ardekani
  16. Banking barriers to the green economy By Hans Degryse; Tarik Roukny; Joris Tielens
  17. Banking across borders: Are Chinese banks different? By Eugenio Cerutti; Catherine Koch; Swapan-Kumar Pradhan
  18. Credit Decomposition and Economic Activity in Turkey: A Wavelet-Based Approach By Oguzhan Cepni; Yavuz Selim Hacihasanoglu; Muhammed Hasan Yilmaz
  19. Marginal returns to talent for material risk takers in banking By Stieglitz, Moritz; Wagner, Konstantin
  20. What can commercial property performance reveal about bank valuations? By Emanuel Kohlscheen; Előd Takáts
  21. Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized By Torsten Ehlers; Mathias Hoffmann; Alexander Raabe
  22. Inside the regulatory sandbox: effects on fintech funding By Giulio Cornelli; Sebastian Doerr; Leonardo Gambacorta; Ouarda Merrouche
  23. Dynamic Default Contagion in Interbank Systems By Zachary Feinstein; Andreas Sojmark
  24. The macro-financial effects of international bank lending on emerging markets By Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli

  1. By: Aref Ardekani (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UNILIM - Université de Limoges)
    Abstract: By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that banks' interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital rations when facing higher illiquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks.
    Keywords: Interbank network topology,Bank regulatory capital,Liquidity risk,Basel III
    Date: 2020–10
  2. By: Bedayo, Mikel; Jiménez, Gabriel; Peydró, José-Luis; Vegas, Raquel
    Abstract: We show that loan origination time is key for bank lending standards, cycles, defaults and failures. We exploit the credit register from Spain, with the time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition), capacity constraints, and borrower-lender information asymmetries are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, shorter precrisis origination time —more than other lending conditions— is associated with more bank-level failures in crises, consistent with lower screening.
    Keywords: loan origination time,lending standards,credit cycles,defaults,bank failures,screening
    JEL: G01 G21 G28 E44 E51
    Date: 2020
  3. By: Ben-David, Itzhak (Ohio State U); Palvia, Ajay A. (Division of Insurance and Research, FDIC); Stulz, Rene M. (Ohio State U and European Corporate Governance Institute)
    Abstract: The moral hazard incentives of the bank safety net predict that distressed banks take on more risk and higher leverage. Since many factors reduce these incentives, including charter value, regulation, and managerial incentives, the net economic effect of these incentives is an empirical question. We provide evidence on this question using two distinct periods that include financial crises and are subject to different regulatory regimes (1985–1994, 2005–2014). We find that distressed banks reduce their leverage and decrease observable measures of riskiness, which is inconsistent with the view that, on average, moral hazard incentives dominate distressed bank leverage and risk-taking policies.
    JEL: G11 G21 G33
    Date: 2020–07
  4. By: Sigurd Galaasen; Rustam Jamilov; Ragnar Juelsrud; Hélène Rey
    Abstract: What is the impact of granular credit risk on banks and on the economy? We provide the first causal identification of single-name counterparty exposure risk in bank portfolios by applying a new empirical approach on an administrative matched bank-firm dataset from Norway. Exploiting the fat tail properties of the loan share distribution we use a Gabaix and Koijen (2020a,b) granular instrumental variable strategy to show that idiosyncratic borrower risk survives aggregation in banks portfolios. We also find that this granular credit risk spills over from affected banks to firms, decreases investment, and increases the probability of default of non-granular borrowers, thereby sizably affecting the macroeconomy.
    JEL: E3 G2
    Date: 2020–10
  5. By: Fatih Tuluk (Department of Economics, Washington University in St. Louis, USA & Department of Economics, Middle East Technical University Northern Cyprus Campus, Turkey)
    Abstract: I construct a model of the ABCP market to capture the trade-offs between traditional and shadow banks. While traditional banks are better equipped in collecting private information, shadow banks can finance more entrepreneurs’ projects since the capital requirements for loans to shadow banks are laxer than those for regular loans. First, the credit risk diminishes the lending capacity of shadow banks, yet it does not activate traditional loans. An increase in the monitoring cost of shadow banks might shift credit from shadow to traditional banks; however, traditional banks cannot restore credit to a level consistent with that initially achieved by shadow banks. Second, the central bank’s private asset purchases transfer credit from traditional to shadow banks and increase the size of funded projects when frictions are moderate in the shadow banking sector. Third, in the case of highly information-sensitive shadow loans, a decrease in the interest rate on reserves improves the lending capacity of shadow banks more than that of traditional banks.
    Keywords: Shadow banking, asset-backed commercial paper, capital
    JEL: E
    Date: 2019
  6. By: Hwang, Sunjoo
    Abstract: Concerns prevail that a policy rate cut could weaken bank profitability and trigger financial instability. However, banks can sustain relatively high net interest margins with little fluctuation despite a rate cut owing to their dominant position in the deposit market and ability to adjust loan maturity. - By virtue of their market dominance, banks set their deposit rates below the base rate by a fixed percentage, and as such, the former falls within a narrower range than the latter. - Because deposit rates are little exposed to base rate fluctuations, banks are able to increase their share of long-term loans which are unaffected by short-term rate changes. This means that lending rates also fall by a smaller margin. - An empirical analysis found that a 1%p change in the call rate, which moves in line with the base rate, adjusts the deposit and lending rates by 0.53%p and 0.58%p, respectively, indicating that the fluctuation (0.05%p) in the net interest margin is statistically insignificant. Therefore, the possibility of financial instability due to a deterioration in bank profitability on a rate cut by the central bank should not be deemed as a constraint.
    Date: 2020
  7. By: Andrea Modena (Institute for Financial Economics and Statistics Department of Economics, University of Bonn)
    Abstract: This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inefficient because agents do not internalize the effects banks’ capitalization over the allocation of capital, its price and, in turn, firms’ investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
    Keywords: Banks, bailout, general equilibrium, financial frictions, recapitalization, welfare
    JEL: D51 G21
    Date: 2020
  8. By: Vincenzo D'Apice (Center for Relationship Banking and Economics (CERBE).); Franco Fiordelisi (Essex Business School.); Giovanni W. Puopolo (Università di Napoli Federico II and CSEF)
    Abstract: We investigate the causal relationship between the efficiency of country’s judicial system and the quality of bank lending, using the enforcing contracts reforms that have been implemented in four European countries as a quasi-natural experiment. We find that improvements of enforcing contracts determine large, significant, and persistent reductions of banks’ non-performing-loans (NPLs). These findings are robust to several difference-in-difference tests and reverse causality concerns. Our results have important policy implications especially at the light of the recent Covid-19 pandemic since they may help the banking system mitigate the virus’ negative financial effects.
    Keywords: Judicial Systems, Non-Performing Loans, Banking Stability.
    JEL: G21 G28
    Date: 2019–11–04
  9. By: Andrés Alonso (Banco de España); José Manuel Carbó (Banco de España)
    Abstract: New reports show that the financial sector is increasingly adopting machine learning (ML) tools to manage credit risk. In this environment, supervisors face the challenge of allowing credit institutions to benefit from technological progress and financial innovation, while at the same ensuring compatibility with regulatory requirements and that technological neutrality is observed. We propose a new framework for supervisors to measure the costs and benefits of evaluating ML models, aiming to shed more light on this technology’s alignment with the regulation. We follow three steps. First, we identify the benefits by reviewing the literature. We observe that ML delivers predictive gains of up to 20?% in default classification compared with traditional statistical models. Second, we use the process for validating internal ratings-based (IRB) systems for regulatory capital to detect ML’s limitations in credit risk mangement. We identify up to 13 factors that might constitute a supervisory cost. Finally, we propose a methodology for evaluating these costs. For illustrative purposes, we compute the benefits by estimating the predictive gains of six ML models using a public database on credit default. We then calculate a supervisory cost function through a scorecard in which we assign weights to each factor for each ML model, based on how the model is used by the financial institution and the supervisor’s risk tolerance. From a supervisory standpoint, having a structured methodology for assessing ML models could increase transparency and remove an obstacle to innovation in the financial industry.
    Keywords: artificial intelligence, machine learning, credit risk, interpretability, bias, IRB models
    JEL: C53 D81 G17
    Date: 2020–10
  10. By: Maixe-Altes, J. Carles
    Abstract: From a historical perspective, the concept of reliability and computing security in the early 1970s, when electronic data transfer processes were in infancy, is especially interesting in terms of their implications in technological change and the business of banking. The cases of Japan, Spain and Germany, in terms of their national banking networks, provide an interesting field of analysis in terms of the implications that the online data transfer systems had for banking institutions. Concerns about the reliability of the computing processes and digital security were the key factors. These innovations laid the foundation for the advancement of networks and new banking services that would open up unprecedented horizons in what was to become known as service banking.
    Keywords: computer security and reliability, banks and savings banks, teleprocessing networks, EFT, ICT in banking
    JEL: G21 O33
    Date: 2020–06
  11. By: Ioanna Avgeri (Athens University of Economics and Business); Yiannis Dendramis (Athens University of Economics and Business); Helen Louri (Athens University of Economics and Business and London School of Economics)
    Abstract: The scope of this paper is to examine if and how the establishment of the Single Supervisory Mechanism (SSM) influenced the profitability of European banks. To do so, we employ the returns on assets and equity as alternative indicators for profitability. Using data for 344 European banks in 2011-2017 we apply the difference-in-differences methodology combined with matching techniques. Our main findings indicate a statistically significant and positive effect on profitability for the directly supervised banks, especially banks located in the periphery of the euro area, implying that institutional improvements introduced by the SSM were beneficial not only for strengthening stability and increasing credibility but also for improving performance and enhancing integration.
    Keywords: European Banking Union; SSM; Bank profitability; policy evaluation
    JEL: C23 C51 G21
    Date: 2020–11
  12. By: Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Sara Pinoli (Bank of Italy); Paola Rossi (Bank of Italy); Alessandro Scopelliti Author-Workplace-European Central Bank (ECB) - Directorate General Economics; University of Zurich - Department of Banking and Finance
    Abstract: We study the effects of the diversification of funding sources on the financing conditions for firms. We exploit a regulatory reform which took place in Italy in 2012, i.e., the introduction of “minibonds”, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm-level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms, suggesting an improvement in their bargaining power with the banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage.
    Keywords: bank credit; capital markets; minibonds; loan pricing; SME finance.
    JEL: G21 G23 G32 G38
    Date: 2020–11
  13. By: Hans Degryse (KU Leuven); Roman Goncharenko (KU Leuven); Carola Theunisz (KU Leuven); Tamas Vadasz (KU Leuven)
    Abstract: What is the impact of environmental consciousness (i.e., being green) as borrower and as lender on loan rates? We investigate this question employing an international sample of syndicated loans over the period 2011-2019. We find that green firms borrow at a signicantly lower spread, especially when the lender consortium can also be classifed as green, i.e., when \green-meets-green". Further tests reveal that the impact of \green-meets-green" became significant and large negative only after the acceptance of the Paris Agreement in December 2015. We argue that this is evidence for lenders responding to policy events which affect environmental attitudes.
    Keywords: Paris Agreement, Green Firms, Green Banks, bank lending
    JEL: A13 G21 Q51 Q58
    Date: 2020–10
  14. By: Joan Calzada (Universitat de Barcelona); Xavier Fageda (Universitat de Barcelona); Fernando Martínez-Santos (Universidad San Pablo CEU)
    Abstract: We analyze the role of bank mergers as determinants of the evolution of branch presence at the county level. Panel regressions based on county-level branch density are used to study differences across urban versus rural counties as well as pre- and post-crisis. The results indicate that bank mergers contributed to the increase of branches in the pre-crisis period and to its reduction in the post-crisis period, but the expansion effect of the mergers before the crisis mainly took place in metropolitan counties. Additional results show that broadband penetration has contributed to the reduction in the number of branches after the crisis and that branch closures are associated with an increase in the share of unbanked and underbanked households at the county level.
    Keywords: Bank branches, Mergers, Competition, Broadband, Financial Exclusion, United States.
    JEL: L16 L22 G21 G34 G38
    Date: 2019
  15. By: Olena Havrylchk (Centre d'Economie de la Sorbonne & LabEx ReFi); Aref Mahdavi Ardekani (Centre d'Economie de la Sorbonne)
    Abstract: This paper explores the short-term impact of borrowing via lending-based crowdfunding on performance and health of small and medium enterprises (SMEs) in France. We find that firms borrowing from lending-based crowdfunding platforms are more dynamic (higher asset growth and higher profitability) and innovative, but they have lower leverage, less cash, higher funding costs and less tangible assets that could be pledged as a collateral. To account for this selection bias, we construct three control groups by using Propensity Score Matching, Mahalanobis Distance Matching and Coarsened Exact Matching methods and then run difference-in-difference regressions. We find that borrowing via lending-based crowdfunding platforms increases SMEs' leverage and interest rate burden in the short-term, but these impacts disappear after two years. We observe asset growth during the year of borrowing, but no impact on sales growth, investment, employment or profitability
    Keywords: lending-based crowdfunding; firm financing; firm performance; informational asymmetry
    JEL: G21 G23 G31 G32
    Date: 2020–08
  16. By: Hans Degryse (KU Leuven and CEPR); Tarik Roukny (KU Leuven); Joris Tielens (National Bank of Belgium)
    Abstract: In the race against climate change, financial intermediaries hold a key role in rapidly redirecting resources towards greener economic activities. However, this transition entails a dilemma for banks: entry of innovative and green firms in polluting industries risks devaluating legacy positions held with incumbent clients. As a result, banks exposed to such losses may be reluctant to finance innovation aiming to reduce polluting activities such as green house gas emissions. In this paper, we formalize potential banking barriers to investments in green firms that threaten the value of legacy contracts by affecting collateral pledged by incumbent clients to banks as well as probabilities of default. We show that themore homogeneous and concentrated the banking system is in a given industry, the fewer new innovative firms will be granted loanable funds. We further exploit data on credit allocations in Belgium between 2008 and 2018, to investigate the empirical relevancy of such barriers in polluting industries with larger exposures to green technology disruption. The results indicate that the market structure of the banking system may be key to facilitating a green economic transition highlighting the need for policies to address the role of brown legacy positions and heterogeneous bank business models.
    Keywords: Financial Intermediation, innovation, barriers, climate change
    Date: 2020–10
  17. By: Eugenio Cerutti; Catherine Koch; Swapan-Kumar Pradhan
    Abstract: We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter crossborder bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks' lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.
    Keywords: cross-border banking, Chinese banks, trade, FDI, gravity model
    JEL: F34 F36 F65 G2
    Date: 2020–10
  18. By: Oguzhan Cepni; Yavuz Selim Hacihasanoglu; Muhammed Hasan Yilmaz
    Abstract: This paper aims to investigate the co-movement between credit growth and gross domestic product (GDP) growth in Turkey over the period January 2004–October 2019. By taking into account alternative credit decomposition and the variations over time and across different frequencies using the wavelet analysis, the results show that: i) GDP growth highly synchronizes with credit growth compared to other financial variables such as stock exchange, bonds, and exchange rate; ii) There is a high correlation between commercial loan growth and capital formation, whereas a relatively weak one is observed between consumer loans and consumption; iii) Co-movement stemming from Turkish Lira (TL) credits to GDP growth is stronger than foreign exchange (FX) credits where the latter is significant until 2015; iv) Public and domestic private banks are the main drivers of economic activity while the foreign banks are following them. By showing the differential coherence of varied types of credit on GDP growth, we specify that shocks to different credit types are crucial to analyze business cycles. For policymakers, this result implies that the dynamics of different credit types are crucial to analyze the impacts of credit cycles on economic activity.
    Keywords: Credit growth, GDP growth, Time variation, Frequency variation, Wavelet analysis
    JEL: E32 E44 F43 F44 C49
    Date: 2020
  19. By: Stieglitz, Moritz; Wagner, Konstantin
    Abstract: Economies of scale can explain compensation differentials over time, across firms of different size, different hierarchy-levels, and different industries. Consequently, the most talented individuals tend to match with the largest firms in industries where marginal returns to their talent are greatest. We explore a new dimension of this size-pay nexus by showing that marginal returns also differ across activities within firms and industries. Using hand-collected data on managers in European banks well below the level of executive directors, we find that the size-pay nexus is strongest for investment banking business units and for banks with a market-based business model. Thus, managerial compensation is most sensitive to size increases for activities that can easily be scaled up.
    Keywords: banks,business models,marginal returns to talent
    JEL: G21 G24 G34
    Date: 2020
  20. By: Emanuel Kohlscheen; Előd Takáts
    Abstract: We test whether commercial property performance, proxied by real estate investment trust (REIT) prices, can inform us about bank equity prices. Using data from the United States, the euro area and Japan, we show that REIT prices can predict bank equity prices. Furthermore, a "commercial property factor" adds significant explanatory power to both the CAPM and the 3-factor Fama-French model. At the same time, quantile regressions show that this factor becomes particularly prominent during downturns. It accounts for around half of the drop in average bank valuations during the great financial crisis and, again, during the Covid-19 pandemic.
    Keywords: asset prices; banks; commercial property; financial stability; real estate.
    JEL: E44 G12 G21
    Date: 2020–11
  21. By: Torsten Ehlers; Mathias Hoffmann; Alexander Raabe
    Abstract: US net capital inflows drive the international synchronization of house price growth. An increase (decrease) in US net capital inflows improves (tightens) US dollar funding conditions for non-US global banks, leading them to increase (decrease) foreign lending to third-party borrowing countries. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of mortgage credit growth and, ultimately, house price growth. Importantly, this synchronization is driven by non-US global banks' common but heterogenous exposure to US dollar funding conditions, not by the common exposure of borrowing countries to non-US global banks. Our results identify a novel channel of international transmission of US dollar funding conditions: As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more dependent on US dollar funding exhibit higher house price synchronization.
    Keywords: house price synchronization, US dollar funding, global US dollar cycle, global imbalances, capital inflows, global banks, global banking network
    JEL: F34 F36 G15 G21
    Date: 2020–10
  22. By: Giulio Cornelli; Sebastian Doerr; Leonardo Gambacorta; Ouarda Merrouche
    Abstract: Policymakers around the world are adopting regulatory sandboxes as a tool for spurring innovation in the financial sector while keeping alert to emerging risks. Using unique data for the UK, this paper provides initial evidence on the effectiveness of the world's first sandbox in improving fintechs' access to finance. Firms entering the sandbox see a significant increase of 15% in capital raised post-entry, relative to firms that did not enter; and their probability of raising capital increases by 50%. Our results furthermore suggest that the sandbox facilitates access to capital through two channels: reduced asymmetric information and reduced regulatory costs or uncertainty. Our results are confirmed when we exploit the staggered introduction of the sandbox and compare firms in earlier to those in later sandbox cohorts, and when we compare participating firms to a matched set of firms that never enters the sandbox.
    Keywords: fintech, regulatory sandbox, startups, venture capital.
    JEL: G32 G38 M13 O3
    Date: 2020–11
  23. By: Zachary Feinstein; Andreas Sojmark
    Abstract: In this work we provide a simple setting that connects the structural modelling approach of Gai-Kapadia interbank networks with the mean-field approach to default contagion. To accomplish this we make two key contributions. First, we propose a dynamic default contagion model with endogenous early defaults for a finite set of banks, generalising the Gai-Kapadia framework. Second, we reformulate this system as a stochastic particle system leading to a limiting mean-field problem. We study the existence of these clearing systems and, for the mean-field problem, the continuity of the system response.
    Date: 2020–10
  24. By: Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli
    Abstract: Banking flows to emerging market economies (EMEs) are a potential source of vulnerability capable of generating boom-bust cycles. The causal effect of such inflows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design. We provide novel empirical evidence on the effects of cross-border bank lending on EMEs macro-financial conditions. We identify causal effects by leveraging the heterogeneity in the size distribution of bilateral cross-border bank lending to construct granular instrumental variables for aggregate cross-border bank lending to 22 EMEs. We find that cross-border bank credit causes higher domestic activity in EMEs through looser financial conditions. Financial condition indices ease, nominal and real effective exchange rates appreciate, sovereign and corporate spreads narrow, and domestic interest rates fall. At the same time, real domestic credit grows, real GDP expands, imports rise, and housing prices increase as well. E ects are weaker for countries with relatively higher levels of capital inflow controls, supporting the view that these policy measures can be effective in dampening the vulnerabilities associated with external funding shocks.
    Keywords: granular instrumental variables; capital flows; emerging markets; cross-border claims; credit shocks; international banking; capital controls.
    JEL: E0 F0 F3
    Date: 2020–11

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