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on International Finance |
| By: | Can Kadirgan |
| Abstract: | Turkish firm-level data suggests that firms borrowing from domestic banks have, on average, a higher degree of currency mismatch than firms with direct access to international financial markets. Higher FX exposure for the former group implies that their balance sheet are more likely to deteriorate when the local currency depreciates. This risk might in turn spillover onto creditors, potentially affecting the financial health of domestic banks. In a set of emerging market economies, I indeed find that when global liquidity tightens, domestic banks are more adversely affected by the above described channel, than firms with direct access to international financial markets. When the US$ index is countercyclical over the global credit cycle, countries whose foreign currency liabilities are heavily weighted in US$ experience a larger valuation effect. Using this variation to identify the exchange rate driven balance sheet effect, I find that banking sectors in countries heavily indebted in US$ have more difficulties accessing foreign funds when global liquidity tightens. In the same countries, this additional hindrance is however absent for firms with direct access to international financial markets. I develop a partial equilibrium model whose predictions are consistent with these results. The results favor the implementation of FX-related macro prudential policies during periods of abundant global liquidity. These policies should reinforce the financial stability of the banking system at a potential reversal of global funds. |
| Keywords: | FX debt, Balance sheet effect, Capital flows, Banks, Systemic risk, Global liquidity |
| JEL: | E0 F0 F3 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1916&r=all |
| By: | Galina Hale; Tumer Kapan; Camelia Minoiu |
| Abstract: | We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks. |
| Keywords: | cross-border interbank exposures ; banking crises ; shock transmission ; bank loans ; real economy |
| JEL: | F34 G01 F36 G21 |
| Date: | 2019–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-52&r=all |
| By: | Alves, C.; Toporowski, J. |
| Abstract: | This paper examines the increasing cross-border flows of capital involving developing and emerging economies in the past few decades. The discussion challenges the traditional economic theories based on net capital flows and deficits in current accounts to explain international borrowing by developing countries, and on the current account imbalances approach to explain financial crises. We argue that the increasing involvement of the private sector in developing countries’ external debt and the fact that the public sector, previously reliant almost entirely on official credit, has become able to access private debt markets, reflect the increasing integration of developing countries into the global financial system, and this process has particular features. A closer look at data on gross capital flows reveals that net capital flows neither explain nor capture this global financial integration. |
| Keywords: | developing and emerging economies, private Non-Guaranteed external debt, cross-border flows, financial globalisation, Borio and Disyatat |
| JEL: | F3 G1 G3 H6 |
| Date: | 2019–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1930&r=all |
| By: | Georgios Georgiadis; Feng Zhu |
| Abstract: | We assess the empirical validity of the trilemma or impossible trinity in the 2000s for a large sample of advanced and emerging market economies. To do so, we estimate Taylor rule-type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country policy rates. However, we also find evidence that is consistent with the notion that the financial channel of exchange rates highlighted in recent work reduces the extent to which local policymakers decide to exploit the monetary autonomy in principle granted by flexible exchange rates in specific circumstances: the sensitivity of local to base-country policy rates for an economy with a flexible exchange rate is stronger when it exhibits negative foreign currency exposures which stem from portfolio debt and bank liabilities on its external balance sheet and when base-country monetary policy is tightened. The intuition underlying this finding is that it may be optimal for local monetary policy to mimic the tightening of base-country monetary policy and thereby mute exchange rate variation because a depreciation of the local currency would raise the cost of servicing and rolling over foreign currency debt and bank loans, possibly up to a point at which financial stability is put at risk. |
| Keywords: | Trilemma, financial globalisation, monetary policy autonomy, spillovers |
| JEL: | F42 E52 C50 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:797&r=all |
| By: | Stefan Avdjiev; Paolo Giudici; Alessandro Spelta |
| Abstract: | We propose a distress measure for national banking systems that incorporates not only banks' CDS spreads, but also how they interact with the rest of the global financial system via multiple linkage types. The measure is based on a tensor decomposition method that extracts an adjacency matrix from a multi-layer network, measured using banks' foreign exposures obtained from the BIS international banking statistics. Based on this adjacency matrix, we develop a new network centrality measure that can be interpreted in terms of a banking system's credit risk or funding risk. |
| Keywords: | international banking, contagion risk, multi-layer networks, tensor decompositions |
| JEL: | G01 C58 C63 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:796&r=all |
| By: | Sangyup Choi; Davide Furceri; Chansik Yoon |
| Abstract: | This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy. |
| Date: | 2019–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/150&r=all |