1. Cross-Border Banking and Channels of Transmission: Evidence from Bilateral Data
Sven Blank (University of Tübingen)
Claudia M. Buch (University of Tübingen and IAW)
12th Dubrovnik Conference
June 29 – 31, 2006
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2. What are the main questions?
Gross foreign assets and liabilities have increased significantly.
Adjustment of global imbalances depends on behavior of gross foreign assets and liabilities.
Do cross-border activities of banks contribute to the transmission of macroeconomic developments?
How heterogenous are responses across countries?
What are the short- and the long-run determinants of banks’ foreign activities?
Foreign bank assets accounted for 130% of world GDP at the end of 2003.
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3. How do we try to answer these questions?
The Data:
Bilateral assets and liabilities of banks in 10 BIS reporting countries in OECD (host) countries.
10 years of quarterly observations ( )
Empirical approach:
Descriptive statistics:
Changing role of the Euro Area
Correlations and volatilities
Regressions:
Gravity equations: Long-run determinants and impact of the Euro
Dynamic panels: Direction of causality and short-run responses
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4. Related empirical literature I
Goldberg (2002, 2005) and Goldberg/Dages/Crystal (2002):
Use bank-level data to study response of lending by US banks to domestic and foreign macroeconomic developments
Cyclical developments are significant but impact of cycle is not stable
Explanatory power is low.
Buch/Carstensen/Schertler (2005):
Use BIS consolidated statistics and find significant short-run dynamics.
Peek and Rosengren (1997, 2000):
Response of lending by Japanese banks in the US to financial market shocks
Weder and van Rijckeghem (2003):
Study ‘common lender effects’ during crises episodes using BIS consolidated statistics.
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5. Related empirical literature II
Empirical literature is much more successful in terms of explaining the stocks of foreign assets and liabilities of banks than the flows.
Large literature using aggregated data (see also Lane and Milesi-Ferretti) but relatively few studies using bilateral data.
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6. Theoretical background
Banking literature and partial equilibrium portfolio models:
Few established models of the international bank
Focus is on specific shocks (e.g. liquidity shocks).
Dynamic open economy general equilibrium models:
Larger number of shocks
No consistent modeling of portfolio adjustment patterns and of the role of banks
Main purpose of this paper is to establish stylized facts.
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7. Data on foreign assets and liabilities of commercial banks
Bank for International Settlements
Locational banking statistics (Tables 2a, 2b, 3a, 3b, 5a)
Comprehensive measures of foreign assets
Bilateral data
Breakdown by currency and type of borrower (not used)
Sample:
Quarterly data
10 reporting and 30 OECD recipient countries
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8. Share of the Euro Area has been relatively stable across reporting countries.
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9. Coefficients of variation are similar for foreign assets and liabilities.
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10. … and they are smaller inside than outside the Euro Area.
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11. Results of the descriptive statistics
No clear trend in the share of the Euro Area in banks’ cross-border assets and liabilities
Foreign assets and liabilities move in parallel.
Exchange rate valuation effects matter.
Correlations and volatilities differ inside and outside the Euro Area.
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12. Cross-border assets of banks depend on gravity-type variables (country fixed effects included).
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13. The introduction of the euro has increased assets holdings inside the Euro Area.
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14. … and results are similar for foreign liabilities.
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15. Results of the cross-section regressions
Simple gravity-type models explain about 2/3 of the variation in banks’ cross-border assets and liabilities across countries (country fixed effects excluded).
Results for size (log GDP) and distance are in line with expectations.
Results for return proxies (nominal interest rates, inflation) are not always in line with expectations.
Assets and liabilities have similar determinants.
Model has much poorer fit for net assets and for changes in assets and liabilities.
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16. Panel model: Tests for Granger non-causality
y = changes in cross-border assets and liabilities of banks
x = changes in real interest rates
Dynamic panel data model
GMM estimator (Blundell and Bond 1998)
Finite sample correction (Windmeijer 2002)
Test on over-identifying restrictions
Test on serial correlation
Country-pair fixed effects
Quarter and year dummies
Euroland dummy
Unbiased
coefficients
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17. Granger tests for non-causality: Foreign assets and liabilities as dependent variables
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18. Granger tests for non-causality: Interest rate differential as dependent variable
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19. Robustness tests
GDP growth and growth of stock market index as alternative return proxies
Split countries by distance
Split up interest rate differential
Use 4 instead of 8 lags
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20. Summary
Does cross-border lending of banks contribute to the transmission of shocks across countries? YES, BUT …
Transmission is of a very short-term nature.
Simple models do not always yield expected results
Are responses heterogeneous across countries? YES
Correlations with macroeconomic developments differ inside and outside the Euro Area.
Volatility is lower inside than outside the Euro Area.
Valuation effects are of different importance.
What are the determinants of banks foreign assets and liabilities?
Geography, size, and regulations matter for stocks.
Flows are difficult to explain.
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21. Future research
Explain missing link between changes in foreign assets and liabilities and return proxies
Portfolio effects
Heterogeneity
Data issues
Establish stylized facts for other (bilateral) capital flows.
Control for macroeconomic shocks
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22. Backup
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23. Valuation effects I
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24. Valuation effects II
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25. Share of assets denominated in Euro and US-Dollar
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26. Share of liabilities denominated in Euro and US-Dollar
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27. Results of panel unit root tests: levels
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28. Results of panel unit root tests: first differences
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