nep-ifn New Economics Papers
on International Finance
Issue of 2015‒01‒14
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies By Philippe D Karam; Ouarda Merrouche; Moez Souissi; Rima Turk
  2. Destabilizing Carry Trades By Guillaume Plantin; Hyun Song Shin
  3. The determinants of global bank credit-default-swap spreads By Hasan, Iftekhar; Liu, Liuling; Zhang, Gaiyan

  1. By: Philippe D Karam; Ouarda Merrouche; Moez Souissi; Rima Turk
    Abstract: We analyze the transmission of bank-specific liquidity shocks triggered by a credit rating downgrade through the lending channel. Using bank-level data for US Bank Holding Companies, we find that a credit rating downgrade is associated with an immediate and persistent decline in access to non-core deposits and wholesale funding, especially during the global financial crisis. This translates into a reduction in lending to households and non-financial corporates at home and abroad. The effect on domestic lending, however, is mitigated when banks (i) hold a larger buffer of liquid assets, (ii) diversify away from rating-sensitive sources of funding, and (iii) activate internal liquidity support measures. Foreign lending is significantly reduced during a crisis at home only for subsidiaries with weak funding self-sufficiency.
    Keywords: Banks;Bank liquidity;Credit ratings;Access to capital markets;Loans;Bank financing;Liquidity management;Credit ratings, Liquidity management, Credit supply, Multinational banks, Internal capital markets
    Date: 2014–11–19
  2. By: Guillaume Plantin (Sciences Po Paris and CEPR (E-mail: guillaume.; Hyun Song Shin (Bank for International Settlements)
    Abstract: We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination 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.
    Keywords: currency carry trades, inflation targeting, financial instability
    JEL: E58 G15
    Date: 2014–12
  3. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Liu, Liuling (Bowling Green State University); Zhang, Gaiyan (University of Missouri-St. Louis)
    Abstract: Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with bank CDS spreads. Second, some CAMELS indicators, including asset quality, cost efficiency, and sensitivity to market risk, contain incremental information for bank CDS prices. Moreover, leverage and asset quality have had a stronger impact on bank CDS since the onset of the recent financial crisis. Banks in countries with lower stock market volatility and/or more financial conglomerates restrictions tend to have lower CDS spreads. Deposit insurance appears to have an adverse effect on CDS spreads, indicating a moral hazard problem.
    Keywords: bank credit default swaps; structural models; CAMELS; global banks
    JEL: G13 G15 G21
    Date: 2014–12–15

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