March 21, 2018

Determinants of cross-border banking

International capital flows in banking have increased over recent decades. The internationalization of banking has thereby been driven by the globalization of economic activity as well as by the deregulation of financial markets. Banks have various possibilities in order to expand their operations into foreign markets: For example, they can operate through their domestic offices (through direct cross-border lending and borrowing). Alternatively, they can set up an affiliate abroad (through FDI). On the one hand, the internationalization allows for risk-sharing possibilities and enables an improvement of the allocation of capital. On the other hand, cross-country linkages can transmit shocks from one banking system to the other. This has become obvious during the recent crisis and fuelled debates about regulatory measures. Yet appropriate regulatory actions require an understanding of the driving forces behind these capital flows. Research on the determinants of cross-border bank activities reveals that geographical or cultural distance, differences in the legal system, arbitrage possibilities or entry barriers affect banks’ international investment decisions. Moreover, growth differentials and interest rate differences may influence cross-border banking.

Published papers

Allen, F., T. Beck, E. Carletti, P. Lane, D. Schoenmaker, and W. Wagner (2011). Cross-border banking in Europe: Implications for financial stability and macroeconomic policies. CEPR eReport, London.

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Buch, C. M. (2005). Distance and international banking. Review of International Economics 13(4): 787-804.

Buch, C. M., J.C. Driscoll, and C. Ostergaard (2010). Cross-border diversification in bank asset portfolios. International Finance 13(1): 79–108.

Buch, C. M., C.T. Koch, and M. Koetter (2011). Size, productivity, and international banking. Journal of International Economics 85(2): 329-334.

Bremus, F., and M. Fratzscher (2015). Drivers of structural change in cross-border banking since the global financial crisis. Journal of International Money and Finance 52: 32-59.

Brown, M., R. De Haas, and V. Sokolov (2015). Regional inflation and financial dollarisation. Forthcoming, Review of Finance.

Caballero, R. J., and Simsek, A. (2018). Reach for Yield and Fickle Capital Flows. AEA Papers and Proceedings 108:  493-498.

Cerutti, E. (2015). Drivers of cross-border banking exposures during the crisis. Journal of Banking & Finance (55): 340-357.

Cerutti, E., and S. Claessens (2017). The Great Cross-Border Bank Deleveraging: Supply Constraints and Intra-Group Frictions. Review of Finance 21: 201-236.

Cerutti, E., S. Claessens, and A. Rose (2019). How important is the Global Financial Cycle? Evidence from capital flows. IMF Economic Review 67: 24-60.

Cerutti, E., G. Dell’Ariccia, and M. S. Martínez Pería (2007). How banks go abroad: Branches or subsidiaries? Journal of Banking and Finance31(6): 1669-1692.

Cerutti, E., G. Hale, and C. Minoiu (2015). Financial crises and the composition of cross-border lending. Journal of International Money and Finance 52: 60-81.

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Claessens, S., and N. van Horen (2015). The impact of the global financial crisis on banking globalization. IMF Economic Review 14/197

De Haas, R., and I. van Lelyveld (2010). Internal capital markets and lending by multinational bank subsidiaries. Journal of Financial Intermediation 19(1): 1-25.

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Degryse, H., and S. Ongena (2005). Distance, lending relationships, and competition. Journal of Finance 60(1): 231-266.

Degryse, H., and S. Ongena (2008). Technology, regulation and the geographical scope of banking. In Handbook of European Financial Markets and Institutions (Oxford University Press): 345-373. X. Freixas, P. Hartmann and C. Mayer (ed.).

Eichler, S., H. Littke and L. Tonzer (2017). Central Bank Transparency and Cross-border Banking. Journal of International Money and Finance74: 1-30.

Focarelli, D., and A.F. Pozzolo (2001). The patterns of cross-border bank mergers and shareholdings in OECD countries. Journal of Banking and Finance 25(12): 2305-2337.

Focarelli, D., and A.F. Pozzolo (2005). Where do banks expand abroad? An empirical analysis. The Journal of Business 78(6): 2435-2464.

Gulamhussen, M., J.-F. Hennart, and C. Pinheiro (2016). What drives cross-border M&As in commercial banking? Journal of Banking & Finance (72): 6-18.

Gurara, D., A. Presbitero, and M. Sarmiento (2020). Borrowing Costs and The Role of Multilateral Development Banks: Evidence from Cross-Border Syndicated Bank Lending. Journal of International Money and Finance 100.

Herrmann, S., and D. Mihaljek (2013). The determinants of cross-border bank flows to emerging markets. Economics of Transition 21(3): 479-508.

Herrero, A. G., and M. S. Martínez Pería (2007). The mix of international banks’ foreign claims: determinants and implications. Journal of Banking and Finance 31(6): 1613–1631.

Heuchemer, S., S. Kleimeier, and H. Sander (2009). The determinants of cross-border lending in the Euro zone. Comparative Economic Studies51(4): 467-499.

Huizinga, H., J. Voget, and W. Wagner. 2014. International taxation and cross-border banking. American Economic Journal: Economic Policy6(2): 94-125.

Jeon, B. N., and M. P. Olivero (2013). An overview: Global banking and financial markets in crisis.International Finance Review 14: 3-11.

Kalemli-Ozcan, S., E. Papaioannou, and J.-L. Peydró (2013). Financial regulation, financial globalization, and the synchronization of economic activity. The Journal of Finance 68(3): 1179-1228.

Kleinmeier, S., S. Heuchemer, and H. Sander (2013). Financial crises and cross-border banking: New evidence. Journal of International Money and Finance 32: 844-915.

McGuire, P., R. McCauley, and G. von Peter (2012). After the global financial crisis: From international to multinational banking? Journal of Economics and Business 64(1): 7-23.

Müller, O., and A. Uhde (2013). Cross-border bank lending: Empirical evidence on new determinants from OECD banking marketsJournal of International Financial Markets, Institutions and Money 23: 136-162.

Niepmann, F. (2015). Banking across borders. Journal of International Economics 96(2): 244-265.

Obstfeld, M. (2020). Globalization Cycles. Italian Economic Journal 6: 1-12.

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Papaioannou, E. (2009). What drives international financial flows? Politics, institutions and other determinants. Journal of Development Economics 88(2): 269-281.

Scott Davis, J., and E. van Wincoop (2018). Globalization and the Increasing Correlation between Capital Inflows and Outflows. Journal of Monetary Economics 100: 83-100.

Working and discussion papers

Aizenman, J., Y-W. Cheung, X. Qian (2019). The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets. NBER Working Paper No. 25934.

Aldasoro, I., S. Avdjiev, C. Borio and P. Disyatat (2020). Global and domestic financial cycles: variations on a theme. BIS Working Papers No. 864.

Alfaro, L., E. Faia, R. Judson, and T. Schmidt-Eisenlohr (2020). Elusive Safety: The New Geography of Capital Flows and Risk. CEPR Discussion Paper No. 14636.

Amiti, M., P. McGuire, and D. Weinstein (2017). Supply- and Demand-Dide Factors in Global Banking. BIS Working Papers No 639.

Avdjiev, S., L. Gambacorta, L. S. Goldberg, and S. Schiaffi (2017). The Shifting Drivers of Global Liquidity. NBER Working Paper No. 23565.

Avdjiev, S., B. Hardy, S. Kalemli-Ozcan, and L. Servén (2018). Gross capital flows by banks, corporates and sovereigns. BIS Working Papers No. 760.

Avdjiev, S., Z. Kuti, and E. Takats (2012). The Euro area crisis and cross-border bank lending to emerging markets. BIS Quarterly Review December 2012. Available at SSRN: http://ssrn.com/abstract=2206339.

Benetrix, A., R. McCauly, P. McGuire, and G. von Peter (2017). Financial deglobalisation in banking? BIS Working Papers No 650.

Bolton, P., and M. Oehmke (2018). Bank Resolution and the Structure of Global Banks. CEPR Discussion Paper DP13032.

Bordo, M. D. (2017). The Second Era of Globalization is Not Yet Over: An Historical Perspective. NBER Working Paper No. 23786.

Bouvatier, V., G. Capelle-blancard, and A.-L. Delatte (2018). Banks Defy Gravity in Tax Havens. CEPR Discussion paper No. 12222.

Burger, J. D., F. E. Warnock, V. Cacdac Warnock (2019). The Natural Level of Capital Flows. NBER Working Paper No. 26184.

Camanho, N., Hau, H., & Rey, H. (2018). Global Portfolio Rebalancing and Exchange Rates. NBER Working Paper No. w24320.

Cerutti, E., S. Claessens, and L. Ratnovski (2014). Global liquidity and drivers of cross-border bank flows. London Centre for Economic Policy Research.

Committee on the Global Financial System (2018). Structural changes in banking after the crisis. CGFS Papers No. 60.

Converse, N., Levy-Yeyati, E., and Williams, T. (2018). How ETFs amplify the global financial cycle in emerging markets. Institute for International Economic Policy Working Paper, 1.

Coppola, A., M. Maggiori, B. Neiman, and J. Schreger (2020). Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens. NBER Working Paper No. 26855.

Deloof, M., and F. Montalto (2017). The Flight Home Effect in Multinational Internal Capital Markets During the Great Recession. SSRN Working Paper id 2976257.

Duijm, P., and D. Schoenmaker (2017). European Banks Straddling Borders: Risky or Rewarding? CEPR Discussion Paper 12159.

Ehlers, T., and P. Wooldridge (2015). Channels and determinants of foreign bank lending. BIS Papers No 82.

Eichengreen, B., and R. Esteves (2019). The Trials of the Trilemma: International Finance 1870-2017. CEPR Discussion Paper No. DP13465.

Everett, M., and V. Galstyan (2017). Cross-Border Banking and Macroeconomic Determinants. TED Working Paper No. 0317.

Faia, E., G. Ottaviano, and I. S. Arjona (2017). International Expansion and Riskiness of Banks. CEPR Working Paper 11951.

Gambacorta, L., S. Mayordomo, and J-M. Serena Garralda (2020). Dollar Borrowing, Firm-Characteristics, and FX-Hedged Funding Opportunities. CEPR Discussion Paper No. DP14419.

Gambacorta L., A. v. Rixtel, and S. Schiaffi (2017). Changing business models in international bank funding. CEPR Discussion Paper 11957.

Goldberg, L. S., S. Krogstrup (2018). International Capital Flow Pressures. IMF Working Paper No.18/30.

Hardy, B. (2018). Foreign currency borrowing, balance sheet shocks and real outcomes. BIS Working Papers No. 758.

Hashimoto, Y., S. Krogstrup (2019). Capital Flows: The Role of Bank and Nonbank Balance Sheets. IMF Working Paper. No. WP/19/85.

Impavido G., H. Rudolph, and L. Ruggerone (2013). Bank funding in Central, Eastern and South Eastern Europe Post Lehman: A “New Normal”? IMF Working Paper 13/148.

Jeanneau, S., and M. Micu (2002). Determinants of international bank lending to emerging market countries. BIS Working Paper 112.

Kaminsky, G. L. (2017). The Center and the Periphery: Two Hundred Years of International Borrowing Cycles. NBER Working Paper No. 23975.

Lee, J.-W. (2008). Patterns and determinants of cross-border financial asset holdings in East Asia. Asian Development Bank Working Papers on Regional Economic Integration 13.

Maggiori, M., B. Neiman, and J. Schreger (2018). International Currencies and Capital Allocation. NBER Working Paper No. 24673.

Massa, M., and S. David (2015). Subcontracting in international asset management: New evidence on market integration. CEPR Discussion Papers DP10465.

Niepmann, F. (2013). Banking across borders with heterogeneous banks. Federal Reserve Bank of New York Staff Reports 609.

Pagliari, M. S., and S. A. Hannan (2017). The Volatility of Capital Flows in Emerging Markets: Measures and Determinants. IMF Working Paper No. 17/41.

Wei, S. J. (2018). Managing Financial Globalization: Insights from the Recent Literature. NBER Working Paper No. 24330.

Other articles

Brüggemann, B., J. Kleinert, and E. Prieto (2012). A gravity equation for bank loans. Mimeo.

Mueller, O., and A. Uhde (2013). Financial crises and volatility of cross-border bank lending: Two sides of the same coin? Mimeo.