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Uncertainty and cross-border banking flows

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  • Choi, Sangyup
  • Furceri, Davide

Abstract

While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of uncertainty in driving bilateral capital flows. This paper examines the effects of higher country-specific uncertainty on cross-border banking flows using data from the Bank for International Settlements Locational Banking Statistics. The bilateral structure of this data allows disentangling supply factors from demand factors, thereby helping identify the effect of higher uncertainty on cross-border banking flows from other confounding factors. The results of this analysis suggest that: (i) uncertainty in a source country (domestic economy) is both a lender-specific push and pull factor that robustly predicts a decrease in outflows (cross-border lending) and inflows (cross-border borrowing); (ii) the decline in cross-border borrowing is larger than the decline in cross-border lending—that is, the net cross-border position of the banking sector increases; (iii) despite a decline in cross-border bank lending in the absolute sense, the share of cross-border bank lending in total bank lending increases, suggesting a portfolio rebalancing; (iv) this rebalancing occurs only when banks are lending to borrowers in advanced economies, but not to those in emerging market economies.

Suggested Citation

  • Choi, Sangyup & Furceri, Davide, 2019. "Uncertainty and cross-border banking flows," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 260-274.
  • Handle: RePEc:eee:jimfin:v:93:y:2019:i:c:p:260-274
    DOI: 10.1016/j.jimonfin.2019.01.012
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    More about this item

    Keywords

    Uncertainty; Cross-border banking flows; Stops; Retrenchment; Portfolio rebalancing; Flight-to-safety;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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