Bilateral cross-border banking and macroeconomic determinants
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Bilateral cross‑border banking and macroeconomic determinants Mary Everett1 · Vahagn Galstyan1
© Kiel Institute 2020
Abstract This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle. Keywords Cross-border banking · Loans · International portfolio securities · Capital controls · Institutional quality JEL Classification F30 · F41 · G15 · G21
We thank Philip Lane for invaluable comments. The views expressed in this paper are personal and do not represent the views of the Central Bank of Ireland. * Vahagn Galstyan [email protected] Mary Everett [email protected] 1
Central Bank of Ireland, Dublin, Ireland
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M. Everett, V. Galstyan
1 Introduction In recent years, the magnitude and composition of international investment has undergone dramatic change. Globally, the composition of investment has shifted towards foreign direct investment (FDI), away from the other investment category (largely reflecting bank activities), with mixed re-allocation within the components of the portfolio investment category (Bussière et al. 2016). Bank deleveraging has been particularly pronounced in the wake of the global financial crisis resulting from interbank market stress, the European sovereign debt crisis and increased regulatory requirements, among other factors (Bénétrix et al. 2019; Emter et al. 2018; Lane and Milesi-Ferretti 2017; Milesi-Ferretti and Tille 2011). The purpose of this empirical paper is twofold. First, it is to investigate the bilateral determinants of the adjustment in the international assets of banks during the global financial crisis and the subsequent recovery phase. Second, it is to examine the role of capital controls and macroeconomic policies as determinants of bilateral adjustment in the international assets of banks. Our choice of the methodology is based on our premise that bilateral data contain more information about international financial positions and flows then unilateral data. Furthermore, our dataset provides a comprehen
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