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Oktober 2017: New VOX EU Column

Bail-ins and bailouts: Incentives, connectivity, and systemic stability

Oktober 2017: New FSB Report

Stocktake on cybersecurity regulatory and supervisory practices

September 2017: New VOX EU Column

International spillovers and local credit cycles: Evidence from Turkey

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Open Call for Papers

2018 Napa Conference on Financial Markets Research

Financial Management Association and UC Davis Graduate School of Management
Napa Valley, CA, March 23 - 24, 2018  
Deadline CfP: November 20, 2017

2018 WFA Meeting / Conference

Western Finance Association
Del Coronado, CA, June 17 - 20, 2018  
Deadline CfP: November 18, 2017

Bank business models: structural changes and their systemic implications

Deutsche Bundesbank, Frankfurt School of Finance & Management and Vrije Universiteit Amsterdam
Frankfurt, February 20-21, 2018  
Keynote speeker: Asli Demirgüç-Kunt
Deadline CfP: October 29, 2017

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Annual meeting of the International Finance and Macroeconomics Program

Fragmentation of International Trade and Finance and Risks from Rising Protectionism
Central Bank Research Association (CEBRA)
London, October 19-20, 2017  
Keynote speakers: Linda Goldberg, Maurice Obstfeld

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The International Banking Library

The International Banking Library is a web-based platform for the exchange of research on cross-border banking. It provides access to data sources, academic research, both theoretical and empirical on cross-border banking, as well as information on regulatory initiatives. The International Banking Library is associated with the International Banking Research Network (IBRN), a research network of Central Banks worldwide. The International Banking Library addresses researchers, policymakers, and students of international banking and economics in search of comprehensive information on international banking issues.

At the Research Frontier     

NBER Working Paper

Authors: Michael D. Bordo
Date: September 2017
Abstract: The recent rise of populist anti-globalization political movements has led to concerns that the current wave of globalization that goes back to the 1870s may end in turmoil just like the first wave which ended after World War I. It is too soon to tell. The decline and then levelling off of trade and capital flows in recent years reflects the drastic decline in global real income during the Great Recession. Other factors at work include the slowing down in the growth rate of China and the reversal of the extended international supply chains developed in the 1990s, as well as increased financial regulation across the world after the crisis. This suggests either a pause in the pace of integration or more likely a slowing down, rather than a reversal.

BIS Working Paper

Authors: Michael Brei, Goetz von Peter
Date: August 2017
Abstract: The empirical gravity literature finds geographical distance to be a large and growing obstacle to trade, contradicting the popular notion that globalization heralds "the end of geography". This distance puzzle disappears, however, when measuring the effect of cross-border distance relative to that of domestic distance (Yotov, 2012). We uncover the same result for banking when comparing cross-border positions with domestic credit, using the most extensive dataset on global bank linkages between countries. The role of distance remains substantial for trade as well as for banking where transport cost is immaterial - pointing to the role of information frictions as a common driver. A second contribution is to show that the forces of globalization are also evident in other, less prominent, parts of the gravity framework.

NBER Working Paper

Authors: Benjamin Bernard, Agostino Capponi, Joseph E. Stiglitz
Date: August 2017
Abstract: This paper develops a framework to analyze the consequences of alternative designs for interbank networks, in which a failure of one bank may lead to others. Earlier work had suggested that, provided shocks were not too large (or too correlated), denser networks were preferred to more sparsely connected networks because they were better able to absorb shocks. With large shocks, especially when systems are non-conservative, the likelihood of costly bankruptcy cascades increases with dense networks. Governments, worried about the cost of bailouts, have proposed bail-ins, where banks contribute. We analyze the conditions under which governments can credibly implement a bail-in strategy, showing that this depends on the network structure as well. With bail-ins, government intervention becomes desirable even for relatively small shocks, but the critical shock size above which sparser networks perform better is decreased; with sparser networks, a bail-in strategy is more credible.

NBER Working Paper

Authors: Eugenio Cerutti, Stijn Claessens, Andrew K. Rose
Date: August 2017
Abstract: This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data dis-aggregated by direction and type between 1990Q1 and 2015Q5 for 85 countries, and conventional techniques, models and metrics. Since the GFCy is an unobservable concept, we use two methods to represent it: directly observable variables in center economies often linked to it, such as the VIX, and indirect manifestations, proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy, in that both methods combined rarely explain more than a quarter of the variation in capital flows. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the United States.

NBER Working Paper

Authors: Mark D. Flood, Dror Y. Kenett, Robin L. Lumsdaine, Jonathan K. Simon
Date: August 2017
Abstract: Large bank holding companies (BHCs) are structured into intricate ownership hierarchies involving hundreds or even thousands of legal entities. Each subsidiary in these hierarchies has its own legal form, assets, liabilities, managerial goals, and supervisory authorities. In the event of BHC default or insolvency, regulators may need to resolve the BHC and its constituent entities. Each entity individually will require some mix of cash infusion, outside purchase, consolidation with other subsidiaries, legal guarantees, and outright dissolution. The subsidiaries are not resolved in isolation, of course, but in the context of resolving the consolidated BHC at the top of the hierarchy. The number, diversity, and distribution of subsidiaries within the hierarchy can therefore significantly ease or complicate the resolution process. The authors propose a set of related metrics intended to assess the complexity of the BHC ownership graph. These proposed metrics focus on the graph quotient relative to certain well identified partitions on the set of subsidiaries, such as charter type and regulatory jurisdiction. The intended measures are mathematically grounded, intuitively sensible, and easy to implement. The authors illustrate the process with a case study of one large U.S. BHC.

SAFE Working Paper

Authors: Reint Gropp, Deyan Radev
Date: August 2017
Abstract: The paper investigates how solvency and wholesale funding shocks to 84 OECD parent banks affect the lending of 375 foreign subsidiaries. It finds that parent solvency shocks are more important than wholesale funding shocks for subsidiary lending. Furthermore, it finds that parent undercapitalization does not affect the transmission of shocks, while wholesale shocks transmit to foreign subsidiaries of parents that rely primarily on wholesale funding. The transmission is affected by the strategic role of the subsidiary for the parent and follows a locational, rather than an organizational pecking order. Surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. The authors document that parent banks tend to use their own capital and liquidity buffers first, before transmitting. Finally, they show that solvency shocks have higher impact on large subsidiary banks with low growth opportunities in mature markets.

NBER Working Paper

Authors: J. Scott Davis, Eric van Wincoop
Date: August 2017
Abstract: The authors document that the correlation between capital inflows and outflows has increased substantially over time in a sample of 128 advanced and developing countries. They provide evidence that this is a result of an increase in financial globalization (stock of external assets and liabilities). This dominates the effect of an increase in trade globalization (exports plus imports), which reduces the correlation between capital inflows and outflows. In the context of a two-country model with 14 shocks we show that the theoretical impact of financial and trade globalization on the correlation between capital inflows and outflows is consistent with the data.

NBER Working Paper

Authors: Erik Heitfield, Gary Richardson, Shirley Wang
Date: July 2017
Abstract: The initial banking crisis of the Great Depression has been the subject of debate. Some scholars believe a contagious panic spread among financial institutions. Others argue that suspensions surged because fundamentals, such as losses on loans, drove banks out of business. This paper nests those hypotheses in a single econometric framework, a Bayesian hazard rate model with spatial and network effects. New data on correspondent networks and bank locations enables us to determine which hypothesis fits the data best. The best fitting models are ones incorporating network and geographic effects. The results are consistent with the description of events by depression-era bankers, regulators, and newspapers. Contagion - both interbank and spatial - propelled a panic which healthy banks survived but which forced illiquid and insolvent banks out of operations.

SSRN Paper

Authors: Yadav Gopalan, Ankit Kalda, Asaf Manela
Date: July 2017
Abstract: Hub-and-spoke regulation, where a central regulator with legal power over firms delegates monitoring to local supervisors, can improve information collection, but can also lead to agency problems and capture. We document that following the closure of a US bank regulator's field offices, the banks they previously supervised distribute cash, increase leverage, and increase their risk of failure, more than similar banks in the same time and place. The opposite occurs for openings. Our findings suggest that field level interaction is an important part of regulation, and that distancing supervisors from banks to prevent regulatory capture can increase bank risk.

CEPR Discussion Paper

Authors: Patty Duijm, Dirk Schoenmaker
Date: July 2017
Abstract: Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.

CEPR Discussion Paper

Authors: Daniel Paravisini, Schnabl Philipp, Veronica Rappoport
Date: July 2017
Abstract: We develop an empirical approach for identifying specialization in bank lending using granular data on borrower activities. We illustrate the approach by characterizing bank specialization by export market, combining bank, loan, and export data for all firms in Peru. We find that all banks specialize in at least one export market, that specialization affects a firm's choice of new lenders and how to finance exports, and that credit supply shocks disproportionately affect a firm's exports to markets where the lender specializes in. Thus, bank market-specific specialization makes credit difficult to substitute, with consequences for competition in credit markets and the transmission of credit shocks to the economy.

CEPR Discussion Paper

Authors: Yener Altunbas, Mahir Binici, Leonardo Gambacorta
Date: July 2017
Abstract: This paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies. There are three main findings. First, there is evidence suggesting that macroprudential tools have a significant impact on bank risk. Second, the responses to changes in macroprudential tools differ among banks, depending on their specific balance sheet characteristics. In particular, banks that are small, weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools. Third, controlling for bank-specific characteristics, macroprudential policies are more effective in a tightening than in an easing episode.