nep-ifn New Economics Papers
on International Finance
Issue of 2018‒11‒05
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Cross-Border Bank Flows through Foreign Branches: Evidence from Korea By Youngjin Yun
  2. Currency depreciation and emerging market corporate distress By Valentina Bruno; Hyun Song Shin
  3. FX funding shocks and cross-border lending: fragmentation matters By Eguren-Martin, Fernando; Ossandon Busch, Matias; Reinhardt, Dennis

  1. By: Youngjin Yun (Economic Research Institute, The Bank of Korea)
    Abstract: Global banks play an important role in international monetary transmission by allocating funds across the world through their foreign affiliates. Using monthly data on individual foreign bank branches in Korea from 2004 to 2018, this paper investigates the effects of foreign monetary policies and Korean macroprudential policy on the cross-border capital flows between global banks' headquarters and their Korean branches. I find that foreign branches reduce borrowing from their headquarters by 2.4% of their assets after a one percentage point hike in the home-country policy rates. The effect is more significant for the branches with higher loan-to-asset ratios as their asset maturities are longer. Korea introduced leverage caps on banks' FX derivative positions in 2010, and has been adjusting the cap depending on the macroeconomic situation. I find that lowering the cap makes foreign branches increase capital by receiving long-term capital from headquarters. The branches with higher bond-to-asset ratios respond more as they trade heavily in FX derivatives.
    Keywords: Foreign bank, Bank flows, Monetary policy, Macroprudential policy
    JEL: G21 F34
    Date: 2018–08–09
  2. By: Valentina Bruno; Hyun Song Shin
    Abstract: How do emerging market corporates fare during periods of currency depreciation? We find that non-financial firms that exploit favorable global financing conditions to issue US dollar bonds and build cash balances are also those whose share price is most vulnerable to local currency depreciation. In particular, firms' vulnerability to currency depreciation derives less from the foreign currency debt as such, but from the cash balances that are built up by using foreign currency debt. Overall, our results point to a financial motive for dollar bond issuance by emerging market firms in carry trade-like transactions that leave them vulnerable in an environment of dollar strength.
    Keywords: emerging market corporate debt, currency mismatch, liability dollarization, global financial conditions
    JEL: E44 G15
    Date: 2018–10
  3. By: Eguren-Martin, Fernando (Bank of England); Ossandon Busch, Matias (Halle Institute for Economic Research); Reinhardt, Dennis (Bank of England)
    Abstract: This paper provides novel empirical evidence on the existence of a cross-border bank lending channel arising from funding shocks in FX swap markets (‘CIP deviations’). Using balance sheet data from UK banks we show that when the cost of obtaining funds in a particular foreign currency increases, banks reduce the supply of cross-border credit in that currency. Notably, this effect is increasing in the degree of banks’ reliance on swap-based FX funding. Fragmentation in funding markets appears to play an important role: we find that high access to foreign FX funding in general, and to internal capital markets in particular, shields banks’ cross-border FX lending supply from the described channel.
    Keywords: Cross-border bank lending; covered interest rate parity deviations; FX swaps; internal capital markets
    JEL: F34 G21
    Date: 2018–10–26

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