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Cross-Border Banking and Macroeconomic Determinants

Author

Listed:
  • Mary Everett

    () (Central Bank of Ireland)

  • Vahagn Galstyan

    () (Trinity College Dublin)

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.

Suggested Citation

  • Mary Everett & Vahagn Galstyan, 2017. "Cross-Border Banking and Macroeconomic Determinants," Trinity Economics Papers tep0317, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:tep0317
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    File URL: https://www.tcd.ie/Economics/TEP/2017/TEP0317.pdf
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    References listed on IDEAS

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    1. Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2016. "Bubble thy neighbour: Portfolio effects and externalities from capital controls," Journal of International Economics, Elsevier, vol. 99(C), pages 85-104.
    2. Galstyan, Vahagn & Lane, Philip R. & Mehigan, Caroline & Mercado, Rogelio, 2016. "The holders and issuers of international portfolio securities," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 100-108.
    3. Eugenio Cerutti & Ricardo Correa & Elisabetta Fiorentino & Esther Segalla, 2017. "Changes in Prudential Policy Instruments - A New Cross-Country Database," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 477-503, March.
    4. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    5. Buch, Claudia M. & Neugebauer, Katja & Schröder, Christoph, 2013. "Changing Forces of Gravity: How the Crisis Affected International Banking," IWH Discussion Papers 15/2013, Halle Institute for Economic Research (IWH).
    6. Matthieu Bussière & Julia Schmidt & Natacha Valla, 2016. "International Financial Flows in the New Normal: Key Patterns (and Why We Should Care)," CEPII Policy Brief 2016-10, CEPII research center.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cross-Border Banking; Loans; International Portfolio Securities; Capital Controls; Institutional Quality;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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