nep-ifn New Economics Papers
on International Finance
Issue of 2014‒08‒16
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. What determines the composition of international bank flows? By Kerl, Cornelia; Niepmann, Friederike
  2. Destabilizing carry trades By Plantin, Guillaume; Shin, Huyn

  1. By: Kerl, Cornelia (Deutsche Bundesbank); Niepmann, Friederike (Federal Reserve Bank of New York)
    Abstract: Several recent studies document that the extent to which banks transmit shocks across borders depends on the type of foreign activities these banks engage in. This paper proposes a model to explain the composition of banks’ foreign activities, distinguishing between international interbank lending, intrabank lending, and cross-border lending to foreign firms. The model shows that the different activities are jointly determined and depend on the efficiencies of countries’ banking sectors, differences in the return on loans across countries, and impediments to foreign bank operations. Specifically, the model predicts that international interbank lending increases and lending to foreign nonbanking firms declines when banks’ barriers to entry rise, a hypothesis supported by German bank-level data. This result suggests that policies that restrict the operations of foreign banks in a country may move activity onto international interbank markets, with the potential to make domestic credit overall less resilient to financial distress.
    Keywords: global banks; interbank market; international bank flows; transmission of shocks
    JEL: F21 F23 F30 G21
    Date: 2014–07–01
  2. By: Plantin, Guillaume; Shin, Huyn
    Abstract: We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supply- ing excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coor- dination device. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.
    Date: 2014–06

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