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 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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 (1995-2004) 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 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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: 1995-2004 Quarterly data 10 reporting and 30 OECD recipient countries 21.11.2018 Blank & Buch

Share of the Euro Area has been relatively stable across reporting countries. 21.11.2018 Blank & Buch

Coefficients of variation are similar for foreign assets and liabilities. 21.11.2018 Blank & Buch

… and they are smaller inside than outside the Euro Area. 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

Cross-border assets of banks depend on gravity-type variables (country fixed effects included). 21.11.2018 Blank & Buch

The introduction of the euro has increased assets holdings inside the Euro Area. 21.11.2018 Blank & Buch

… and results are similar for foreign liabilities. 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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 21.11.2018 Blank & Buch

Granger tests for non-causality: Foreign assets and liabilities as dependent variables 21.11.2018 Blank & Buch

Granger tests for non-causality: Interest rate differential as dependent variable 21.11.2018 Blank & Buch

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 21.11.2018 Blank & Buch

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. 21.11.2018 Blank & Buch

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 21.11.2018 Blank & Buch

Backup 21.11.2018 Blank & Buch

Valuation effects I 21.11.2018 Blank & Buch

Valuation effects II 21.11.2018 Blank & Buch

Share of assets denominated in Euro and US-Dollar 21.11.2018 Blank & Buch

Share of liabilities denominated in Euro and US-Dollar 21.11.2018 Blank & Buch

Results of panel unit root tests: levels 21.11.2018 Blank & Buch

Results of panel unit root tests: first differences 21.11.2018 Blank & Buch