nep-ifn New Economics Papers
on International Finance
Issue of 2020‒02‒03
three papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The fundamentals of safe assets By Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  2. Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending By Bussière, Matthieu; Hills, Robert; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Sowerbutts, Rhiannon
  3. Government Guarantees and Bank Vulnerability during a Crisis: Evidence from an Emerging Market By Viral V. Acharya; Nirupama Kulkarni

  1. By: Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by financial shocks rather than by US monetary policy. JEL Classification: E42, E52, F31, F36, F41
    Keywords: fundamentals, global risk, monetary policy, safe assets
    Date: 2020–01
  2. By: Bussière, Matthieu (Banque de France); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Autorité de Contrôle Prudentiel et de Régulation (ACPR), Banque de France); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge.
    Keywords: Cross-border bank lending; monetary policy; prudential policy; policy interactions; spillovers; financial centre.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2020–01–10
  3. By: Viral V. Acharya; Nirupama Kulkarni
    Abstract: We analyze the performance of Indian banks during 2007–09 relative to their vulnerability to a crisis measured using pre-crisis data, in order to study the impact of government guarantees on bank performance during a crisis. Using bank branch-level regulatory data, we exploit geographic variation in the exposure to state-owned banks to show that vulnerable private sector bank branches in districts with greater exposure to state-owned banks experienced deposit withdrawals and shortening of deposit maturity. In contrast, nearby vulnerable state-owned bank branches grew their deposit base and increased loan advances but with poorer ex-post performance of loans. Our evidence suggests that access to stronger government guarantees during aggregate crises allows even vulnerable state-owned banks to access and extend credit cheaply despite their under-performance, and this renders private sector banks especially vulnerable to crises.
    JEL: G01 G21 G28 H1
    Date: 2019–12

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