This paper uses loan-level data from 124 countries over 1995-2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.
On May 9, 2010 euro zone countries announced the creation of the European Financial Stability Facility as a response to the sovereign debt crisis. This paper investigates the impact of this announcement on bank share prices, bank CDS spreads and sovereign CDS spreads. The main private beneficiaries were bank creditors, especially of banks heavily exposed to southern Europe and Ireland and located in countries characterized by weak public finances. Furthermore, countries with weak public finances and banking systems heavily exposed to southern Europe and Ireland benefited, as evidenced by lower sovereign CDS spreads. The combined gains of bank debt holders and shareholders exceed the increase in the value of their sovereign debt exposures, suggesting that banks saw their contingent claim on the financial safety net increase in value.
We present a model in which flat (state-independent) capital requirements are undesirable because of shocks to bank capital. There is a rationale for countercyclical capital requirements that impose lower capital demands when aggregate bank capital is low. However, such capital requirements also have a cost as they increase systemic risk taking: by insulating banks against aggregate shocks (but not bankspecific ones), they create incentives to invest in correlated activities. As a result, the economy's sensitivity to shocks increases and systemic crises can become more * We thank participants at the FIRS conference in Dubrovnik, the workshop on "Understanding Macroprudential Regulation" at Norges Bank, the LSE workshop on financial models, the joint conference by the Central Bank of the Republic of Turkey, Bank for International Settlements and the International Monetary Fund on "Macroprudential Policy" in Istanbul, the joint conference by the Bank of England, the Basel Committee Research Task Force and the Centre for Economic Policy Research on "The interaction of regulatory instruments" in London, the workshop on systemic risk at Nottingham University, the workshop on "Liquidity, Banking and Financial Markets" at the University of Bologna, the conference on financial stability in Luxembourg, the summer workshop of the Hungarian Science Academy, the EFMA conference in Reading and
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