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February 2018: New VoxEU Column

The Chinese banking system: Much more than a domestic giant.


February 2018: EU Stress Tests

EBA launches 2018 EU-wide stress test exercise.


February 2018: New IBL Newsletter

The latest issue of the quarterly IBL Newsletter is now available.


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Open Call for Papers


4th IWH-FIN-FIRE Workshop on “Challenges to Financial Stability”

Halle (Saale), August 20-21, 2018  
IWH Halle and Frankfurt School of Finance & Management
Keynote speaker: Ran Duchin (University of Washington) and José-Luis Peydró (Universitat Pompeu Fabra and Barcelona GSE)
Deadline CfP: April 28, 2018



The Conference “Ten Years after the Global Financial Crisis: What Have We Learned about Ensuring Financial Stability?”
Amsterdam, June 25-26, 2018  
De Nederlandsche Bank
Deadline CfP: February 28, 2018



Eleventh Annual Conference of The Paul Woolley Centre for the Study of Capital Market Dysfunctionality in collaboration with the Bank for International Settlements
London, June 7-8, 2018  
BIS and The Paul Woolley Centre for the Study of Capital Market Dysfunctionality
Deadline CfP: March 15, 2018


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Conferences


EC Conference

European Commission
Brussels, March 1-2, 2018  
International Financial Integration in a Changing Policy Context–the End of an Era?



Securities Markets: Trends, Risks and Policies Conference

Bocconi University
Milan, March 2, 2018  



Showcasing Women in Finance 2018

University of Miami
Coral Gables, FL, March 2, 2018  


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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: Nelson Camanho, Harald Hau and Hélène Rey
Date: February 2018
Abstract: We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.

IMF Working Paper

Authors: Eugenio M Cerutti and Gee Hee Hong
Date: February 2018
Abstract: Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows (both by types of instrument and borrower) shows interesting heterogeneity. There has been substitution of bank loans for portfolio debt securities not only in the case of corporate and sovereign borrowers in advanced countries, but also sovereign borrowers in emerging countries. In the case of corporate borrowers in emerging markets, the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries associated with the global financial cycle, but rather by country-specific factors.

NBER Working Paper

Authors: Shang-Jin Wei
Date: February 2018
Abstract: This paper seeks to draw lessons for developing countries based on a survey of the recent literature on financial globalization. First, while capital account openness holds promises (by potentially lowering cost of capital, promoting risk sharing, and providing disciplines on policies), it does not always work out that way in the data. Distortions in the domestic financial market, international capital market, domestic labor market, and domestic public governance can all make financial globalization less beneficial for developing countries. Second, developing countries may seek to avoid the effects of foreign monetary policy shocks. The empirical pattern appears to be somewhere between a trilemma and a dilemma. While nominal exchange rate flexibility provides some policy autonomy but not consistently, capital flow management can confer additional insulation against foreign monetary shocks.

IMF Working Paper

Authors: Linda S. Goldberg and Signe Krogstrup
Date: February 2018
Abstract: This paper presents a new measure of capital flow pressures in the form of a recast Exchange Market Pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes the Global Risk Response Index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.

CEPR Working Paper

Authors: Maurice Obstfeld, Jonathan D. Ostry and Mahvash S. Qureshi
Date: February 2018
Abstract: This paper examines the relevance of exchange rate regimes in the transmission of global financial shocks to domestic financial and macroeconomic conditions. Our findings suggest that even in today's highly financially integrated world, the nominal exchange rate regime does matter-at least for emerging market economies. The transmission of global financial shocks to domestic variables is magnified under fixed exchange rate regimes relative to more flexible regimes. For advanced economies, however, the jury is still out, as the recent paucity of truly fixed regimes among these economies poses a challenge for estimating the effect of exchange rate flexibility.

CEPR Working Paper

Authors: Ata Can Bertay, Asli Demirguc-Kunt and Harry Huizinga
Date: December 2017
Abstract: This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization using data for 113 countries over the 2000-2015 period. We investigate if international banks headquartered in developing countries behave and perform differently than those headquartered in high-income countries. Results show that compared to domestic banks, international banks have lower valuations and achieve lower returns on equity in general. This suggests on average bank internationalization has progressed beyond the point where it is in the interest of bank shareholders, potentially because of corporate governance failures and too-big-to-fail subsidies that accrue to large and complex banks. In contrast, developing country international banks seem to have benefited from internationalization compared to their high-income counterparts. Furthermore, for international banks headquartered in developing countries, bank internationalization reduces the cyclicality of their domestic credit growth with respect to domestic GDP growth, smoothing out local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing.

NBER Working Paper

Authors: Eduardo Dávila and Ansgar Walther
Date: December 2017
Abstract: We explore how large and small banks make funding decisions when the government provides system-wide bailouts to the financial sector. We show that bank size, purely on strategic grounds, is a key determinant of banks' leverage choices, even when bailout policies treat large and small banks symmetrically. Large banks always take on more leverage than small banks because they internalize that their decisions directly affect the government's optimal bailout policy. In equilibrium, small banks also choose strictly higher borrowing when large banks are present, since banks' leverage choices are strategic complements. Overall, the presence of large banks increases aggregate leverage and the magnitude of bailouts. The optimal ex-ante regulation features size-dependent policies that disproportionally restrict the leverage choices of large banks. A quantitative assessment of our model implies that an increase in the share of assets held by the five largest banks from 50% to 70% is associated with a 3.5 percentage point increase in aggregate debt-to-asset ratios (from 90.1% to 93.6%). Under the optimal policy, large banks face a “size tax” of 40 basis points (0.4%) per dollar of debt issued.

BIS Working Paper

Authors: Elõd Takáts and Judit Temesvary
Date: December 2017
Abstract: We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which a saw strong slowdown in cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN's macroprudential database. Our results suggest that macroprudential measures implemented in borrowers' host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.

NBER Working Paper

Authors: Joshua Aizenmann, Menzie D. Chinn and Hiro Ito
Date: December 2017
Abstract: We investigate whether and to what extent macroprudential policies affect the financial link between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We first estimate the correlation of the policy interest rates between the CEs and the PHs and use that as a measure of financial sensitivity. We then estimate the determinants of the estimated measure of financial sensitivity as a function of country-specific macroeconomic conditions and policies. The potential determinant of our focus is the extensity of macroprudential policies. From the estimation exercise, we find that a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves (IR); when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.

IMF Working Paper

Authors: Eugenio M. Cerutti and Haonan Zhou
Date: November 2017
Abstract: Post-crisis dynamics show a shrinkage in the overall amount of crossborder bank lending, which has been interpreted in the literature as a retreat in financial globalization. In this paper, we argue that aggregate figures are not sufficient to support such a claim in terms of the overall structure of the global banking network. Based on a systematic approach to measuring, mapping and analyzing financial interconnectedness among countries using network theory, we show that, despite the decline in aggregate lending volumes, the structure of the network has developed increased connections in some dimensions. Some parts of the network are currently more interlinked regionally than before the crisis, and less dependent on major global lenders. In this context, at a more disaggregate level, we document the characteristics of the increasing regionalization of lending flows, the different evolution of linkages through bank affiliates and direct cross-border claims, as well as the shift in the importance of key borrower and lender nodes. These changes in the banking network have important insights in terms of policy implications since they indicate that the global banking network has evolved, but it has not undergone a generalized retrenchment in financial linkages.

NBER Working Paper

Authors: Graciela L. Kaminsky
Date: October 2017
Abstract: A common belief in both academic and policy circles is that capital flows to the emerging periphery are excessive and ending in crises. One of the most frequently mentioned culprits is the cycles of monetary easing and tightening in the financial centers. Also, many focus on the role of crises in the financial center, pointing to excess international borrowing predating crises in the financial center and global retrenchment in capital flows in its aftermath. I re-examine these views using a newly-constructed database on capital flows spanning 200 hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages: During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of central banks in the financial centers. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. I find that boom-bust capital flow cycles in the periphery are milder in the second episode of financial globalization when the financial center follows a cyclical monetary policy. Also, cyclical monetary policy in the financial center is far more pronounced in times of crises in the financial center, cutting short capital flow bonanzas in the periphery and injecting liquidity in the aftermath of the crisis.

CESifo Working Paper

Authors: Sven Steinkamp, Aaron Tornell and Frank Westermann
Date: September 2017
Abstract: The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.

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.