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Cross-Border Banking and Global Liquidity

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  • Valentina Bruno
  • Hyun Song Shin

Abstract

We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.

Suggested Citation

  • Valentina Bruno & Hyun Song Shin, 2015. "Cross-Border Banking and Global Liquidity," Review of Economic Studies, Oxford University Press, vol. 82(2), pages 535-564.
  • Handle: RePEc:oup:restud:v:82:y:2015:i:2:p:535-564
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    File URL: http://hdl.handle.net/10.1093/restud/rdu042
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    1. Andrew K. Rose & Mark M. Spiegel, 2010. "Cross‐Country Causes And Consequences Of The 2008 Crisis: International Linkages And American Exposure," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 340-363, August.
    2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    4. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    5. G. Peersman & W. Wagner, 2014. "Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/874, Ghent University, Faculty of Economics and Business Administration.
    6. Philip R. Lane & Barbara Pels, 2012. "Current Account Imbalances in Europe," The Institute for International Integration Studies Discussion Paper Series iiisdp397, IIIS.
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