The Determinants of Cross-border Bank Flows to Emerging Markets: New Empirical Evidence on the Spread of Financial Crises by Herrmann and Mihaljek Discussion David Vavra 16 th Dubrovnik Economic Conference June

Discussion Points What I have learnt What I would like to learn What puzzled me Data and specification issues

What I have learnt (I) Global and country specific factors are significant determinants of cross-border flows Global risk aversion and market volatility most important factors behind the decline in flows in the crisis

What I have learnt (II) Deeper financial integration and sounder banking systems limited the decline in CESE Fixed exchange rate limited the decline in CESE

GDP Level and Potential Output (CNB‘s Forecast) Permanent loss in output level, but not in growth rate (in line with IMF, WEO, Oct 2009)? Long-Term Impact of Crisis

Real Convergence Real convergence observed only in the past 10 years Question: will it resume? Importance of free capital flows Source: Eurostat Czech GDP in PPP as % of EU27

Real Convergence and bank cross-border flows External positions of BIS reporting banks (ex rate edjusted, q-o-q, in % GDP) Unique data set on bank flows Banks were the main source of capital for catch-up growth in CESE Financial markets in CESE dominated by banks

What I would like to learn about: Policy Implications What is the effect of regulation on these flows? Could we distinguish between a cross-border flows to banking and non-banking sectors? What can policy do about affecting these determinants? What was the effect of specific policy actions preventing the decline in cross-border flows. e.g. the Vienna initiative. How come that CESE performed better in region specific factors in the crisis than other EMs, when CESE flows were actually hit more? The openness and bank health story not too convincing Fixed ex rate as a shelter in the crisis Conducive to more flows and perhaps also more growth?

Floaters’ Output Performance on Average Better than Peggers’ 9 * to Euro, EA15 to USD Source: Eurostat, CNB

Other comments: The choice of explanatory variables Endogeneity and causality Changing sings, decreasing significance with lag effects Risk-return characteristics of loans UIP, or excess return performance? Should really a high interest rate differential imply higher flows? Exchange rate depreciation reducing flows? Nominal vs real rates of return CA deficit and credit growth as explanatory variables – why surprised by positive signs

Other comments: Data issues The flow data are adjusted for exchange rate movements – wouldn’t some real measure or relative to GDP be even more appropriate? How does the database incorporate NPLs – does it keep loans at a book value? Data are gross – e.g. Vienna initiative made participating banks keep their exposures – this effect is not captured Each type of flow finances different activity and should have different determinants Is capital included – an important type of cross-border flow Subsidiary flow – mortgages and small business Non-bank flows – businesses