March 13, 2018

Research

The financial crisis has revealed the urgent need to better understand the determinants and consequences of cross-border banking. Banks’ decision to internationalize can be determined by entry barriers, geographical distance or growth prospects. The entry of foreign banks into domestic markets can bring along benefits and costs for the host country. While efficiency of the host country’s banking market can be improved through the entry of foreign banks, cross-border activities can transmit shocks. This reveals the necessity of supranational regulation and supervision. For an appropriate design of (inter)national regulation and supervision, it is important to understand how banks are connected within and across borders. Along these lines, we provide information on relevant literature, main research questions and findings for each of the following topics.


Macroprudential Policy and Regulation

The macroprudential approach focuses on risks arising in foreign financial markets and the impact of financial distress on important financial institutions.

Research Questions:
  • How to design stabilizing macroprudential policy instruments?
  • How to deal with the interactions between macroprudential and (i)monetary policy and (ii)microprudential policy?
  • Are macroprudential policy instruments effective or do they induce adverse behavior and evasion?

 

Determinants of cross-border banking

International capital flows in banking have increased over recent decades.

Research Questions:
  • What determines the decision of banks to internationalize?
  • Why do banks choose a certain mode of entry?
  • Which factors have affected cross-border activities of banks during the crisis?

 

Foreign banks and domestic markets

In recent decades, the banking sector has become more international. This internationalization of banks has occurred, amongst others, through the set up of foreign affiliates.

Research Questions:
  • How does foreign bank entry affect the market structure of the host country?
  • What are the benefits and risks associated with hosting foreign banks?
  • Does the presence of foreign banks impact on domestic credit supply?

 

Transmission of shocks via international banks

Cross-border linkages of banks can transmit liquidity shocks from one country to another. This has become obvious during the recent financial crisis, where internationally active banks played an important role in the transmission of shocks. A liquidity shock can be transferred from one country abroad to the domestic country due to various channels… [more]

Research Questions:
  • Which channels transfer shocks in the financial sector across borders?
  • How does a liquidity shock abroad affect lending at home?
  • Does the transmission of shocks depend on banks’ balance sheet characteristics?

 

Cross-border bank regulation and supervision

Internationally active banks can be a source of systemic risk as a default of one bank can easily spill over to banks in other countries. This implies that financial market stability in one country influences stability in another country. For this reason, different countries should have an incentive to cooperate… [more]

Research Questions:
  • What are the effects of national supervision and regulation on international stability?
  • What are the costs and benefits of shifting supervision and regulation to the supranational level?
  • How should multinational banks be regulated and supervised?

 

International banking networks

Financial systems of different countries have become more interconnected in recent years. This process of financial integration allows for a better diversification of risks. However, internationally connected banking systems entail a higher risk of spreading local shocks to a supranational or even worldwide level… [more]

Research Questions:
  • How does the network structure affect financial stability?
  • Does the position of a bank in the international banking network affect its soundness?
  • How has the international banking network evolved over time?