The stabilizing role of local claims in local currency on the variation of foreign claims

The paper provides an in-depth analysis of the development of and stabilizing factors behind foreign claims for international banking groups. It focuses on the headquarters locations of the 76 banking groups that participated in the assessment exercise for global systemically important banks at the end of 2020, examining the behavior of their banking systems’ foreign claims (assets) from 2000 to 2022. The study finds that during systemic crises, banking systems with a higher reliance on local claims in local currency (claims booked by foreign branches or subsidiaries vis-à-vis their own residents in the country’s currency) experience a significantly smaller decline in foreign claims. Specifically, a one standard deviation increase in the ratio of local claims in local currency to foreign claims reduces the decline in foreign claims by 0.11 standard deviations during a crisis. Additionally, the paper provides evidence that a high proportion of local claims in local currency mitigates the variation in foreign claims when the country hosting the banking system’s headquarters is experiencing economic growth or stock market volatility.