nep-ifn New Economics Papers
on International Finance
Issue of 2014‒09‒29
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-border banking and global liquidity By Valentina Bruno; Hyun Song Shin
  2. Institutional investor portfolio allocation, quantitative easing and the global financial crisis By Joyce, Michael; Liu, Zhuoshi; Tonks, Ian

  1. By: Valentina Bruno; Hyun Song Shin
    Abstract: We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
    Keywords: Cross-border banking flows, bank leverage, global banks
    Date: 2014–08
  2. By: Joyce, Michael (Bank of England); Liu, Zhuoshi (Bank of England); Tonks, Ian (University of Bath)
    Abstract: We examine how the Bank of England’s quantitative easing (QE) policy during the global financial crisis affected the investment behaviour of insurance companies and pension funds and whether their behaviour was consistent with the operation of the so-called 'portfolio balance channel' that has been emphasised by UK and US monetary policy makers as a key channel through which QE works. To assess the incremental impact of QE, we need some counterfactual of how the investment behaviour of institutional investors would have changed in the absence of the policy. We construct this by conditioning on variables that explain portfolio allocation but are invariant to the QE policy itself, which allows us to construct both ex-ante and ex-post counterfactuals. Our analysis of a range of data sources, including national accounts net investment data and micro-data on life insurance companies and pension funds, suggests QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds relative to the counterfactual. Although analysis of the micro-data does suggest some heterogeneity in the response to QE across different institutions, the shift into corporate bonds was quite widespread. However, portfolio rebalancing by institutional investors into riskier assets seems to have been limited to corporate bonds and did not extend to equities.
    Keywords: Institutional investors; asset allocation; quantitative easing; portfolio balance channel; financial crisis
    JEL: C22 C23 E61 E65 G11
    Date: 2014–09–12

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