Global banks and crisis transmission (original) (raw)
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Global banking and international business cycles
European Economic Review, 2011
This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007-09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
Applied Economics, 2013
We exploit a dataset on financial integration within Europe to answer a novel question in the international RBC literature. Does financial integration within Europe matter for the international transmission of business cycles between the United States and Europe? We find that it does, and that as European countries become more financially integrated among themselves, European business cycles start to "decouple" from those in the United States. We show that this is true for three macro indicators of economic activity: GDP, consumption and investment, and for five alternative measures of the degree of financial integration. We also show that the effect of trade linkages becomes insignificant once financial factors are accounted for. Our work has interesting policy implications since it unveils the importance of further integration in the European Union to slow down the transmission of aggregate shocks among industrialized nations.
International Banks and the Cross-Border Transmission of Business Cycles
SSRN Electronic Journal, 2011
We study the link between the cross-border funding activities of global banks and the international transmission of business cycles. First, using a dataset compiled by the Federal Reserve Board, we document three stylized facts about the operations of foreign banks in the United States: (i) The net borrowing of foreign branches from their parent banks is procyclical with the U.S. economy. (ii) The lending of foreign branches to U.S. …rms is procyclical, and also more volatile than the lending of the domestically chartered banks. (iii) The lending of foreign subsidiaries to small U.S. …rms is procyclical and more volatile than the corresponding lending by U.S. banks, indicating the presence of an extensive margin in foreign banks' lending to U.S. …rms. Second, we build a two-country, dynamic stochastic general equilibrium model to explain these cyclical ‡uctuations in international bank lending and study their macroeconomic implications. In the model, each economy consists of: one representative household that provides bank deposits; two types of banks, "local"and "global", where the latter collects deposits from abroad and issues loans to foreign …rms in addition to its domestic operations; a continuum of monopolistically-competitive …rms that are heterogeneous in labor productivity, and that choose endogenously to borrow working capital from either the local or the global bank. Our model provides a framework to analyze the economic impact of proposed Basel III liquidity regulations.
International Business Cycle and Financial Intermediation
Journal of Money, Credit and Banking
The worldwide …nancial crisis of 2007 to 2009 caused bankruptcy and bank failures in the US and many other parts such as Europe. Recent empirical evidence suggests that this simultaneous drop in output was strongest in countries with greater …nancial ties to the US economy with important cross border deposit and lending. This paper develops a two-country framework to allow for banking structures within an international real business cycle model. The banking structure across countries is modelled using the production approach to …nancial intermediation. We allow both countries'banks to be able to take deposits both locally and internationally. We analyze the transmission mechanism of both goods and banking sector productivity shocks. We show that goods total factor productivity (TFP) and bank TFP have di¤erent e¤ects on the …nance premium. Most countries have shown procyclic equity premium over their histories but with evidence that these are countercyclic during the Great Recession especially. The model has the ability to explain the countercyclical movements of credit spreads during major recession and …nancial crisis when goods TFP also a¤ects banking productivity. This we model as a cross correlation of shocks to replicate the recent events during the crisis period. Importantly, the model can also explain business cycles facts and the countercyclical behaviour of the trade balance.
Business Cycle Fluctuations and International Financial Integration
2004
Theoretical research on the determinants of business-cycle fluctuations implies that the degree of international financial integration can have important implications for the propagation of, e.g., macroeconomic policy shocks in an open economy. An important assumption underlying this research is that the degree of financial integration can be taken as exogenously given. Because recent empirical research has demonstrated that financial integration may change over time, we use data for the G7 countries to test how well this assumption fits to the data. We find that one can maintain, as a rule, the assumption that the degree of financial integration is invariant to the determinants of the business-cycle fluctuations. We find, however, a few exceptions from this rule, and we also find that shocks tend to have a highly persistent effect on financial integration.
Banking, Financial Integration, and International Crises: An Overview
2002
This paper summarizes new research on the relationship among institutions, financial development, economic growth, financial integration, and the likelihood of boom-bust cycles and banking crises. The first part of the paper reviews issues pertaining mainly to the banking sector, and summarizes new findings regarding banking regulation and supervision and the behavior of depositors and other market participants. New findings on the internationalization of banking, boom-bust cycles and macro-financial linkages during financial integration, the elements of international financial crises, and the role of capital controls to reduce macroeconomic vulnerability are reviewed in the second part of the paper.
Foreign banks, financial crises and macroeconomic fluctuations
Economics of Transition, 2016
Understanding the implications of increased foreign bank presence is especially compelling in periods of financial crisis. In this paper, we explore this issue by examining the relationship between the involvement of foreign banks in the banking systems and the volatility of key macroeconomic variables in normal and crisis periods. Using a sample of 20 Emerging European countries from 1998 to 2013, we find that an increase in the assets of foreign banks in the banking system reduces output and consumption growth volatility in general but does not significantly affect the volatility of investments. However, these banks were found to play a significant role in increasing output, consumption and investment volatility in 2009. Our findings suggest that foreign banks' harmful impact during the global crisis was only temporary and that they seem to help Emerging European countries stabilize macroeconomic volatility in normal times and after the global crisis.
Synchronization between Financial Crisis and International Business Cycles: Evidence from Asia *
2013
The recent financial crisis, as the most important event in the world economy, has affected countries substantially through structural changes in socio-economic and political issues. The co-movements of international business cycles have generally increased as a result of the global financial crisis and that is because of simultaneous fall in economic activity in many economies during the global financial crisis. Accordingly, Fidrmuc and Korhonen (2010) analyze the transmission of global financial crisis to business cycles in China and India, displaying a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. In addition, IMF (2008) argues that the current slowdown of the world economy could have a significantly larger impact on Asian economies than earlier global downturns, because of more extensive trade and financial integration of Asian economies. The objective of this paper is to evaluate a possible synchronized relationship b...
Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity
Journal of Finance, 68(3), 1179-1228, 2013
We analyze the impact of financial globalization on business cycle synchronization utilizing a proprietary database on banks' international exposure for industrialized countries during 1978-2006. Theory makes ambiguous predictions and identification has been elusive due to lack of bilateral time-varying financial linkages data. In contrast to conventional wisdom and previous empirical studies, we identify a strong negative effect of banking integration on output synchronization , conditional on global shocks and country-pair heterogeneity. Similarly, we show divergent economic activity as a result of higher integration using an exogenous de-jure measure of integration based on financial regulations that harmonized EU markets. This is a preprint from February 2010. ‘Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity’, Sebnem Kalemli-Ozcan, Elias Papaioannou, José-Luis Peydró, The Journal of Finance, 68(3), 1179-1228, 2013, has been published in final form at https://doi.org/10.1111/jofi.12025 It is also available as an ECB Working Paper No. 1221 (https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1221.pdf) and at Universitat Pompeu Fabra's e-repository (http://hdl.handle.net/10230/43264)