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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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