nep-ifn New Economics Papers
on International Finance
Issue of 2014‒08‒09
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What determines cross-border bank lending and risk-taking? The effects of culture, geography, institutions, and information exchange By Owen, Ann L.; Temesvary, Judit
  2. Sovereign credit ratings and the transnationalization of finance: Evidence from a gravity model of portfolio investment By Körner, Finn Marten; Trautwein, Hans-Michael

  1. By: Owen, Ann L.; Temesvary, Judit
    Abstract: We explore the effects of culture, regulation, and geographical factors on bilateral cross-border bank lending. Using a newly compiled dataset on BIS-reporting banks’ activities, we find that geographical factors, information flows and common institutional arrangements are the primary drivers of bilateral bank lending. Trust between individuals in the two countries matters only as a proxy for other cultural similarities. The relationship between bank regulatory differences and lending flows has changed over time. Before the crisis, banks made more cross-border loans in countries with regulations that promoted market discipline and transparency, but took on more risk in countries that had less transparency, perhaps in pursuit of higher returns. This relationship between transparency and banking flows has disappeared in the aftermath of the financial crisis.
    Keywords: bank lending; international banking; bank regulations; gravity models; cross-country analysis
    JEL: E51 F3
    Date: 2014–07–29
  2. By: Körner, Finn Marten; Trautwein, Hans-Michael
    Abstract: It is a matter of debate in how far credit ratings contribute to allocative efficiency or to excessive volatility of asset prices and cross-border capital flows. Yet it is generally taken for granted that ratings play a significant role in the transnationalization of financial relations. This paper tests the hypothesis with regard to data on sovereign credit ratings and foreign portfolio investment. A rating-related gravity model of finance is derived from the choice-theoretical framework of Okawa and van Wincoop (Gravity in International Finance, 2012) and estimated in three stages. At the first stage, the authors find that the introduction and evolution of sovereign ratings and their gradual improvement since the 1970s has affected inward portfolio investment stocks and flows in host countries. At the second stage, the authors examine to which extent sovereign ratings help to predict the degree of investors' home bias, as measured by the share of outward portfolio investment holdings in the home countries' portfolios, and whether they can account for the divergent dynamics before and after the global financial crisis. At the third stage, the authors look at the explanatory content of ratings for the determination of the size of bilateral portfolio investment. Evidence for a significant role of sovereign ratings is found at all three stages. --
    Keywords: credit rating agencies,portfolio investment,gravity model,home bias
    JEL: F41 G11 G24
    Date: 2014

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