nep-ifn New Economics Papers
on International Finance
Issue of 2020‒11‒16
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. The macro-financial effects of international bank lending on emerging markets By Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli
  2. Banking across borders: Are Chinese banks different? By Eugenio Cerutti; Catherine Koch; Swapan-Kumar Pradhan

  1. By: Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli
    Abstract: Banking flows to emerging market economies (EMEs) are a potential source of vulnerability capable of generating boom-bust cycles. The causal effect of such inflows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design. We provide novel empirical evidence on the effects of cross-border bank lending on EMEs macro-financial conditions. We identify causal effects by leveraging the heterogeneity in the size distribution of bilateral cross-border bank lending to construct granular instrumental variables for aggregate cross-border bank lending to 22 EMEs. We find that cross-border bank credit causes higher domestic activity in EMEs through looser financial conditions. Financial condition indices ease, nominal and real effective exchange rates appreciate, sovereign and corporate spreads narrow, and domestic interest rates fall. At the same time, real domestic credit grows, real GDP expands, imports rise, and housing prices increase as well. E ects are weaker for countries with relatively higher levels of capital inflow controls, supporting the view that these policy measures can be effective in dampening the vulnerabilities associated with external funding shocks.
    Keywords: granular instrumental variables; capital flows; emerging markets; cross-border claims; credit shocks; international banking; capital controls.
    JEL: E0 F0 F3
    Date: 2020–11
  2. By: Eugenio Cerutti; Catherine Koch; Swapan-Kumar Pradhan
    Abstract: We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter crossborder bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks' lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.
    Keywords: cross-border banking, Chinese banks, trade, FDI, gravity model
    JEL: F34 F36 F65 G2
    Date: 2020–10

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