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Foreign Bank Subsidiaries’ Default Risk during the Global Crisis
This paper examines the association between the default risk of foreign bank subsidiaries in developing countries and their parents during the global financial crisis, with the purpose of determining the size and sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from their parents. We find evidence of a significant and robust positive correlation between parent banks’ and foreign subsidiaries’ default risk. This correlation is lower for subsidiaries that have a higher share of retail deposit funding and that are more independently managed from their parents. Host country bank regulations also influence the extent to which shocks to the parents affect the subsidiaries’ default risk. In particular, the correlation between the default risk of subsidiaries and their parents is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements, and tougher restrictions on bank activities.
Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures
We analyze the joint impact of macroprudential and capital control measures on cross-border banking flows, while controlling for multidimensional aspects in lender-and-borrower-relationships (e.g., distance, cultural proximity, microprudential regulations). We uncover interesting spillover effects from both types of measures when applied either by lender or borrowing countries, with many of them most likely associated with circumvention or arbitrage incentives. While lender countries’ macroprudential policies reduce direct cross-border banking outflows, they are associated with larger outflows through local affiliates. Direct cross-border inflows are higher in borrower countries with more usage of macroprudential policies, and are linked to circumvention motives. In the case of capital controls, most spillovers seem to be present through local affiliates. We do not find evidence to support the idea that additional capital inflow controls could interact with macro-prudential policies to mitigate cross-border spillovers.
The Global Banking Network: What is Behind the Increasing Regionalization Trend?
This paper analyses the nature of the increasing regionalization process in global banking. Despite the large decline in aggregate cross-border banking lending volumes, some parts of the global banking network are currently more interlinked regionally than before the Global Financial Crisis. After developing a simple theoretical model capturing banks' internationalization decisions, our estimation shows that this regionalization trend is present even after controlling for traditional gravitational variables (e.g. distance, language, legal system, etc.), especially among lenders in EMs and non-core banking systems, such as Australia, Canada, Hong Kong, and Singapore. Moreover, this regionalization trend was present before the GFC, but it has increased since then, and it seems to be associated with regulatory variables and the opportunities created by the retrenchment of several European lenders.
Why Did Public Banks Lend More During the Global Financial Crisis?
During the Global Financial Crisis (GFC), state-owned or public banks lent relatively more than domestic private banks in many countries. However, data limitations have hindered a thorough assessment of what led public banks to better maintain lending during the GFC. Using a novel bank-level dataset covering 25 emerging market economies, we show that public banks lent relatively more during the GFC because they pursued an objective of helping to stabilize the economy, rather than because they had superior fundamentals or access to public or depositors’ funding. Nonetheless, their countercyclical behavior seems unique to the GFC rather than a regular characteristic of public banks before and after the GFC.
Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect
We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While off-shore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, on-shore EM CIP deviations are largely unresponsive in segmented FX markets. Moreover, the sensitivity of offshore EM CIP deviations to global risk factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. We find weak evidence of country default risk affecting EM CIP deviations after accounting for global factors.
China's Bond Market and Global Financial Markets
A cross-country comparative analysis shows that there is substantial room for further integration of China into global financial markets, especially in the case of the international bond market. A further successful liberalization of the Chinese bond market would encompass not only loosening bond market regulations, but also further developing of other markets, notably the foreign exchange market. Even though the increased integration of China into international capital markets would increase its exposure to the global financial cycle, the costs in terms of monetary autonomy would not be large given China’s size and especially under a well-articulated macroeconomic framework.
A Primer on Bitcoin Cross-Border Flows: Measurement and Drivers
The rapid growth of crypto assets raises important questions about their cross-border usage. To gain a better understanding of cross-border Bitcoin flows, we use raw data covering both on-chain (on the Bitcoin blockchain) and off-chain (outside the Bitcoin blockchain) transactions globally. We provide a detailed description of available methodologies and datasets, and discuss the crucial assumptions behind the quantification of cross-border flows. We then present novel stylized facts about Bitcoin cross-border flows and study their global and domestic drivers. Bitcoin cross-border flows respond differently than capital flows to traditional drivers of capital flows, and differences appear between on-chain and off-chain Bitcoin cross-border flows. Off-chain cross-border flows seem correlated with incentives to avoid capital flow restrictions.
Managed Trade: What Could be Possible Spillover Effects of a Potential Trade Agreement Between the U.S. and China?
The trade discussions between the U.S. and China are on-going. Not much is known about the shape and nature of a potential agreement, but it seems possible that it would include elements of managed trade. This paper attempts to examine the direct, first-round spillover effects for the rest of the world from managed trade using three approaches. The results suggest that, in the absence of a meaningful boost in China’s domestic demand and imports, bilateral purchase commitments are likely to generate substantial trade diversion effects for other countries. For example, the European Union, Japan, and Korea are likely to have significant export diversion in a potential deal that includes substantial purchases of U.S. vehicles, machinery, and electronics by China. At the same time, a deal that puts greater emphasis on commodities would put small commodity exporters at a risk. This points to the advantages of a comprehensive agreement that supports the international system and avoids managed bilateral trade arrangements.
How Important is the Global Financial Cycle? Evidence from Capital Flows
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; 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.
The Slowdown in Global Trade: A Symptom of A Weak Recovery
Global trade growth has slowed since 2012 relative both to its strong historical performance and to overall economic growth. This paper aims to quantify the role of weak economic growth and changes in its decomposition in accounting for the slowdown in trade using a reduced form and a structural approach. Both analytical investigations suggest that the overall weakness in economic activity, particularly investment, has been the primary restraint on trade growth, accounting for over 80 percent of the decline in the growth of the volume of goods trade between 2012–16 and 2003–07. However, other factors are also weighing on trade in recent years, especially in emerging market and developing economies, as evidenced by the non-negligible role attributed to trade costs by the structural approach.
