nep-ifn New Economics Papers
on International Finance
Issue of 2014‒11‒07
five papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Credit conditions and foreign direct investment during the global financial crisis By Desbordes, Rodolphe; Wei, Shang-Jin
  2. Shock transmission through international banks: the Italian case By Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli; Enrico Sette
  3. Implications of Liquidity Management of Global Banks for Host Countries - Evidence from Foreign Bank Branches in Hong Kong By Eric Wong; Andrew Tsang; Steven Kong
  4. Forex Trading and the WMR Fix By Martin Evans
  5. Interest rate caps around the world: still popular, but a blunt instrument By Maimbo, Samuel Munzele; Henriquez Gallegos, Claudia Alejandra

  1. By: Desbordes, Rodolphe; Wei, Shang-Jin
    Abstract: This paper investigates the effect that tight credit conditions had on outward foreign direct investment flows during the 2008-2010 global financial crisis. A difference-in-differences approach is used to isolate a"credit channel"impact of the global financial crisis on foreign direct investment. The global financial crisis had a stronger negative impact on the relative volume of outward foreign direct investment in financially vulnerable sectors in more financially developed countries, especially if these countries also experienced a banking crisis. These results suggest that lack of access to external finance can partly explain the drop in foreign direct investment during the global financial crisis.
    Keywords: Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research,Emerging Markets
    Date: 2014–10–01
  2. By: Marianna Caccavaio (Banca d'Italia); Luisa Carpinelli (Banca d'Italia); Giuseppe Marinelli (Banca d'Italia); Enrico Sette (Banca d'Italia)
    Abstract: This paper studies what impact liquidity shocks have on liquid assets and domestic and cross-border lending. In particular, we look for differences across banks depending on their international exposure and we account for the effects of the sovereign debt crisis and the ECBÂ’s non-conventional monetary policy measures. Our main findings are that liquid assets are important drivers of lending adjustment to liquidity risk and that this effect is significant for domestic lending but not for foreign lending even considering the characteristics of the destination market. Differences in banksÂ’ international exposure play a limited role in the way liquidity shocks are transmitted. Creation-Date: 2014-09
    Keywords: liquidity shock, cross-border lending, international banks
    JEL: G20 G21
  3. By: Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Steven Kong (Hong Kong Monetary Authority)
    Abstract: Using a regulatory dataset of foreign bank branches in Hong Kong, this study finds evidence of the international transmission of funding shocks from home countries of global banks through their internal capital markets during the 2007-08 financial crisis. Global banks are found to buffer parent-bank liquidity shocks by repatriating cross-border internal funding, leading to reductions in loan supply by branches in Hong Kong. Branches with a higher loan-to-asset ratio are estimated to cut loan supply sharper than their counterparts. More liquid assets held by parent banks and central bank liquidity are found to reduce the extent of shock transmission significantly
    Keywords: Global Banks, Internal Capital Market, Liquidity Management, Shock Transmission Number: 212014
    JEL: E44 F36 G32
    Date: 2014–08
  4. By: Martin Evans (Department of Economics, Georgetown University)
    Abstract: Since 2013 regulators have been investigating the activities of some of the world's largest banks around the setting of daily benchmarks for forex prices. These benchmarks are a key linchpin of world financial markets, providing standardize prices used to value global equity and bond portfolios, to hedge currency exposure, and to write and execute derivatives' contracts. The most important of these benchmarks,called the "London 4pm Fix", "the WMR Fix" or just the "Fix", is published by the WM Company and Reuters based on forex trading around 4:00 pm GMT. This paper undertakes a detailed empirical analysis of the how forex rates behave around the Fix drawing on a decade of tick-by-tick data for 21 currency pairs. The analysis reveals that the behavior of spot rates in the minutes immediately before and after 4:00 pm are quite unlike that observed at other times. Pre- and post-Fix changes in spot rates are extraordinarily volatile and exhibit strong negative serial correlation, particularly on the last trading day of each month. These statistical features appear pervasive, they are present across all 21 currency pairs throughout the decade. However, they are also inconsistent with the predictions of existing microstructure models of competitive forex trading.
    Keywords: Forex Trading, Order Flows, Forex Price Fixes, Microstructure Trading Models
    JEL: F3 F4 G1
    Date: 2014–08–01
  5. By: Maimbo, Samuel Munzele; Henriquez Gallegos, Claudia Alejandra
    Abstract: Among other common forms of government financial control, caps on interest rates have been declining over the past several decades as most industrialized countries and a rising number of developing countries continue liberalizing their financial policies. However, in several countries the last financial crisis reopened the debate on interest rate controls as a tool for consumer protection. This paper undertakes a stock-taking exercise to determine the number of countries currently capping interest rates on loans. The paper looks at the main characteristics of the regimes countries have used, including the source of rate-setting authority, the methodology, and the criteria for establishing the cap. The paper finds at least 76 countries around the world currently use some form of interest rate caps on loans -- all with varying degrees of effects, including the withdrawal of financial institutions from the poor or from specific segments of the market, an increase in the total cost of the loan through additional fees and commissions, among others. The paper concludes that there are more effective ways of reducing interest rates on loans over the long run and of improving access to finance: measures that enhance competition and product innovation, improve financial consumer protection frameworks, increase financial literacy, promote credit bureaus, enforce disclosure of interest rates, and promote microcredit products. Such measures should be implemented in an integrated manner. However, if caps are still considered a useful policy tool for reducing interest rates on loans and increasing access to finance, they should be implemented in accord with the caveats described in the paper.
    Keywords: Access to Finance,Financial Literacy,Debt Markets,Banks&Banking Reform,Investment and Investment Climate
    Date: 2014–10–01

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