What Drives Cross-Border Flows?

Bayangos, Veronica and Moreno, Ramon (2021): What Drives Cross-Border Flows?

Abstract

This paper examines the drivers and impact of cross-border bank financial positions in a destination emerging market economy (the Philippines) for global banks using a unique dataset of disaggregated data for 55-58 internationally active banks during the period 2015 to 2020. The data allow us to analyze the cross-border asset position of banks in the destination country, as well as the cross-border liabilities, thus going beyond the traditional focus on cross-border liabilities only. We find that global risk appetite, real exchange rate movements, return on assets and the spread between the domestic policy rate and the US Fed funds rate influence cross-border financial positions. We also find, apparently for the first time in this type of study, that the domestic credit cycle for banks in the destination country affects the cross-border asset position of banks. This effect is stronger in foreign banks. A separate analysis of how cross-border financial positions affect the domestic credit cycle reveals that these have a significant positive impact for all banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: cross-border bank flows, credit cycle, risk-taking
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F44 - International Business Cycles

References

Baskaya, Y., Soner, J. di G., Kalemli-Özcanc, Peydro, J-L., Ulua, M.F., 2017. Capital flows and the international credit channel. Journal of International Economics, 108(S1): S15-22.

Bayangos, V., Elloso, L., Hallig, J.M., Yeung, J.N., and Salamatin, A.M., 2016. The Impact of Foreign Exchange Liberalization Reforms on the Philippine Economy: An Initial Assessment. BSP Working Paper Series No. 2016-01. March 2016.

Bayangos, V., Briones, R.L., Suguitan, R. and Lucela, D., 2020. Chapter 5: How Philippine Banks are Holding Up Amid the Pandemic, BSP Unbound: Central Banking and the COVID-19 Pandemic in the Philippines. BSP.

Boelsch, M., Jadulan, R. and Camacho, K., 2020. Box Article: Views from the Trading Desk in Chapter 4: Leveraging Monetary Tools to Maintain Macroeconomic Stability, BSP Unbound: Central Banking and the COVID-19 Pandemic in the Philippines. BSP.

Borio, C. and Disyatat, P., 2011. Global Imbalances and the Financial Crisis: Link or No Link? Bank for International Settlements, Working Paper No. 346.

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt? Journal of Banking and Finance 45 (2014) 182-198.

Buch, C., Bussiere, M., Goldberg, L., Hills, R. 2018. The International Transmission of Monetary Policy. NBER Working Paper Series 24454.

Committee on International Economic Policy and Reform, 2012. A Report on Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses, Brookings Institution.

Bruno, V. and Shin, H., 2015b. Cross-border banking and global liquidity. Review of Economic Studies 82:535–64.

Bruno, V., and Shin, H., 2015a. Capital flows and the risk-taking channel of monetary policy. Journal of Monetary Economics 71:119–32.

Cetorelli, N., and L. Goldberg, L. 2012. Liquidity management of U.S. global banks: Internal capital markets in the great recession. Journal of International Economics 88: 299–311.

Choi, S. and Furceri, D., 2018. Uncertainty and Cross-Border Banking Flows, IMF Working Paper WP/18/4, International Monetary Fund.

Correa, R., Paligorova, T., Sapriza, H. and Zlate, A., 2021. Cross-Border Bank Flows and Monetary Policy. The Review of Financial Studies, pp 1-44.

Disyatat, P. (2011). The Bank Lending Channel Revisited. Journal of Money Credit and Banking: 43(4):711-734.

Drehmann, M. and Yetman, Y., 2018. Why you should use the Hodrick-Prescott filter – at least to generate credit gap. BIS Working Papers No 744.

Hannan, S.A., 2017. The Drivers of Capital Flows in Emerging Markets Post Global Financial Crisis. Journal of International Commerce, Economics and Policy, Vol. 8, No. 2, pp. 1–28.

Hannan, S.A., 2018. Revisiting the Determinants of Capital Flows to Emerging Markets--A Survey of the Evolving Literature. IMF Working Papers 2018/214, International Monetary Fund.

Hermann, S., and D. Mihaljek (2010), The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises, BIS Working Papers No. 315, July 2010.

Kashyap, A. K., and Stein, J. 2000. What do a million observations on banks say about the transmission of monetary policy? American Economic Review 90: 407–428.

Koepke, R., 2019. What drives capital flows to emerging markets? A survey of the empirical literature. Journal of Economic Surveys, 33(2): pp 516-540.

Robleza, E. J., Batac, C.V., Alhambra, P.R., Dacio, J., Ocampo, L J.C., Ganapin, L. and Bautista, D.M., 2020. Chapter 4: Leveraging Monetary Tools to Maintain Macroeconomic Stability, BSP Unbound: Central Banking and the COVID-19 Pandemic in the Philippines, BSP.