Capital Flows, Cross-Border Banking and Global Liquidity

Abstract

We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows.

Cross-border banking claims on emerging countries: The Basel III Banking Reforms in a push and pull framework

“…They conclude that a drop of 100 basis points in the interest rate differential results in a 3% drop in bank lending flows. Bruno and Shin (2012) examine changes in the structure of bank balance sheets as push factors on cross-border lending 11 from the perspective of two variablesthe leverage ratio and the volume of the banks' equity. The VIX is taken as an inverse proxy for the banks' leverage ratio, based on observation of the diverging historical paths of those two variables in two major internationally active banks (Goldman Sachs and Morgan Stanley), and this may be seen as a limitation of their paper.…”

On the Determinants of Surges and Stops in Foreign Loans: An Empirical Investigation

“…For example, Kaminsky and Reinhart (2000) and Pritsker (2001) emphasize international commercial banks' massive withdrawal of foreign loans from the region as a main cause of the 1997-98 East Asian financial crisis. The crisis spillover to emerging economies during the 2008 global financial crisis is largely attributed to the fact that advanced countries' global banks greatly reduced crossborder loans to those economies in order to deleverage the banks' balance sheets (Bruno and Shin 2013;Cetorelli and Goldberg 2011;Milesi-Ferretti and Tille 2011). Thus, focusing on extreme loan episodes is worthwhile.…”

What is the major determinant of cross-border banking flows?

“…4 After the financial crisis in the late 2000s, the determinants of global capital flows gained renewed attention. Forbes and Warnock (2012), Bruno and Shin (2015), and Rey (2013) all indicate that global movements in international capital flows are highly correlated with the volatility index (VIX) that is considered a proxy for the risk sentiments of global investors. Of these researches, Bruno and Shin (2015) construct a structural model of global banking activities and describe how the risk sentiments of global banks affect international credit flows.…”

“…Forbes and Warnock (2012), Bruno and Shin (2015), and Rey (2013) all indicate that global movements in international capital flows are highly correlated with the volatility index (VIX) that is considered a proxy for the risk sentiments of global investors. Of these researches, Bruno and Shin (2015) construct a structural model of global banking activities and describe how the risk sentiments of global banks affect international credit flows. 5 4 Vast amounts of research have been accumulated in the literature such as Calvo et al (1996), Fernandez-Arias (1996, Kim (2000), Taylor and Sarno (1997), Chuhan et al (1998), andHernandez et al (2001).…”