nep-ifn New Economics Papers
on International Finance
Issue of 2013‒04‒13
eight papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Understanding Financial Crises: Causes, Consequences, and Policy Responses By Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
  2. Multinational Banking and Financial Contagion: Evidence from Foreign Bank Subsidiaries By Bang Nam Jeon; Maria Pia Olivero; Ji Wu
  3. Capital Flows and the Risk-Taking Channel of Monetary Policy By Valentina Bruno; Hyun Song Shin
  4. Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises By Eijffinger, Sylvester C W; Karatas, Bilge
  5. Understanding global liquidity By Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
  6. Rethinking the state's role in finance By Cihak, Martin; Demirguc-Kunt, Asli
  7. Exchange Rate Exposure and Exchange Rate Risk Management: The case of Japanese exporting firms By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  8. Deleveraging from Emerging Markets. The Case of Euro-area Banks By Alicia Garcia-Herrero; Fielding Chen

  1. By: Claessens, Stijn; Kose, Ayhan; Laeven, Luc; Valencia, Fabian
    Abstract: The global financial crisis of 2007-09 has led to an intensive research program analyzing a wide range of issues related to financial crises. This paper presents a summary of a forthcoming book, Financial Crises: Causes, Consequences, and Policy Responses, that includes 19 contributions examining these issues and distilling policy lessons. The book covers a wide range of crises, including banking, balance-of-payments, and sovereign debt crises. It reviews the typical patterns prior to crises, considers lessons on their antecedents, and analyzes their evolution and aftermath. It also provides valuable policy lessons on how to prevent, contain and manage financial crises.
    Keywords: asset price busts; banking crises; credit busts; currency crises; debt crises; defaults; global financial crisis; prediction of crises; restructuring; sudden stops; welfare cost
    JEL: E32 E5 E6 F44 G01 H12
    Date: 2013–01
  2. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Maria Pia Olivero (Drexel University); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Using bank-level data on 368 foreign subsidiaries of 68 multinational banks in 47 emerging economies during 1994-2008, we present consistent evidence that internal capital markets in multinational banking contribute to the transmission of financial shocks from parent banks to foreign subsidiaries. We find that internal capital markets transmit favorable and adverse shocks by affecting subsidiaries¡¦ reliance on their own internal funds for lending. We also find that the transmission of financial shocks varies across types of shocks; is strongest among subsidiaries in Central and Eastern Europe, followed by Asia and Latin America; is global rather than regional; and became more conspicuous in recent years than before. We also explore various conditions under which the international transmission of financial shocks via internal capital markets in multinational banking is stronger, including the subsidiaries' reliance on funds from their parent bank, the subsidiaries' entry mode, and the capital account openness and banking market structure in host countries.
    Keywords: Internal Capital Markets, Multinational Banking, Transmission of Financial Shocks
    JEL: E44 F43 G21
    Date: 2013–05
  3. By: Valentina Bruno; Hyun Song Shin
    Abstract: We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.
    JEL: E5 F32 F33 F34 G21
    Date: 2013–04
  4. By: Eijffinger, Sylvester C W; Karatas, Bilge
    Abstract: The sovereign debt default and the linkages from banking and currency crisis have been rarely explored in the crisis literature. This study attempts to dive into this unexplored area by applying panel data binary choice model on a sample with 20 emerging countries having monthly observations for the years between 1985 and 2007. The non-linear linkages from currency and banking crises to sovereign defaults are explored by using the interactions of these crises with international illiquidity, appreciated real exchange rates and real international monetary policy rates. It is discovered that currency, banking and debt crises tend to occur simultaneously. Prior occurrence of a currency crisis increases the sovereign default probability through appreciated real exchange rates, and in countries with high short-term indebtedness the occurrence of banking crisis raises the probability of a debt crisis.
    Keywords: banking crisis; currency crisis; debt crisis; emerging markets
    JEL: F31 F41 G01 H63
    Date: 2013–03
  5. By: Eickmeier, Sandra; Gambacorta, Leonardo; Hofmann, Boris
    Abstract: We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand. --
    Keywords: global liquidity,monetary policy,credit supply,credit demand,international business cycles,factor model,sign restrictions
    JEL: E5 E44 F3 C3
    Date: 2013
  6. By: Cihak, Martin; Demirguc-Kunt, Asli
    Abstract: The global financial crisis has given greater credence to the idea that active state involvement in the financial sector can be helpful for stability and development. There is now evidence that, for example, lending by state-owned banks has helped in mitigating the impact of the crisis on aggregate credit. But evidence also points to negative longer-term effects of direct interventions on resource allocation and quality of intermediation. This suggests a need to rebalance the state's roles from direct to less direct involvement, as the crisis subsides. The state does have very important roles, especially in providing well-defined regulations and enforcing them, ensuring healthy competition, and strengthening financial infrastructure. One of the crisis lessons is the importance of getting the basics right first: countries with complex but poorly enforced regulations suffered more during the global crisis. Evidence also suggests that instead of restricting competition, the state needs to encourage contestability through healthy entry of well-capitalized institutions and timely exit of insolvent ones. There is also new evidence that supports the state's key role in promoting transparency of information and reducing counterparty risk. The challenge of financial sector policies is to better align private incentives with public interest, without taxing or subsidizing private risk-taking.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Financial Intermediation,Emerging Markets
    Date: 2013–04–01
  7. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: In this paper, we estimate Japanese firms' exchange rate exposure and investigate the impact of exchange rate risk management on them. By using the results of the questionnaire survey sent to all Tokyo Stock Exchange listed firms in 2009, we conduct empirical analysis to investigate whether each risk management tool—financial and operational hedging, the choice of invoice currency, and the price revision strategy (pass-through)—specifically affects their foreign exchange exposure. As a result, we confirm the following characteristics: first, firms with larger dependency on foreign markets have larger foreign exchange exposure. Second, the higher is the U.S. dollar invoicing share, the larger is the foreign exchange exposure, but it is reduced by using both financial and operational hedging. Third, yen invoicing itself reduces the foreign exchange exposure. These findings indicate that Japanese firms utilize operational and financial hedging strategies and price revision policy depending on their choice of invoicing currency.
    Date: 2013–04
  8. By: Alicia Garcia-Herrero; Fielding Chen
    Abstract: This paper shows stylized facts on the rather large retrenchment of cross-border lending by Euro-area banks into emerging markets. The clearest case is Asia where Euro-area banks have massively lost market share. The reason, however, is not only related to their retrenching but also to the surge in lending from others banks, especially from Emerging Asia. As a second step, we investigate empirically the determinants of cross-border bank flows with a gravity model and differentiate across Euro-area, US and Asian banks. We find a number of home factors behind the retrenchment in lending. Two are common to all home countries analyzed, namely global risk aversion and trade which, respectively, discourage and foster banks’ overseas lending. Other factors, however, are specific of Euro-area banks, such as the higher cost of funding which is found to discourage lending while poor economic growth tends to foster it. The latter result would indicate that economic weakness of the last few years may have actually cushioned Euro-area banks’ deleveraging from emerging markets. All in all, Euroarea banks’ cross border lending appear to be more dependent on their cycle (both in terms of growth and external cost of funding) when compared with US and Asian banks.
    Keywords: cross-border bank lending, emerging markets, Euro area, deleveraging
    JEL: F34 G01 O57 C23
    Date: 2013–03

This nep-ifn issue is ©2013 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.