International Bank Portfolios: Short- and Long-Run Responses to Macroeconomic Conditions

Abstract

International bank portfolios constitute a large component of international country portfolios. Yet, banks' response to international macroeconomic conditions remains largely unexplored. We use a novel dataset on banks' international portfolios to answer three questions. First, what are the long-run determinants of banks' international portfolios? Second, how do banks' international portfolios adjust to short-run macroeconomic developments? Third, does the speed of adjustment change with the degree of financial integration? We find that, in the long-run, market size has a positive impact on foreign assets and liabilities. An increase in the interest differential between the home and the foreign economy lowers foreign assets and increases foreign liabilities. Foreign trade has a positive impact on international bank portfolios, which is independent from the effect of other macroeconomic variables. Short-run dynamics show heterogeneity across countries, but these dynamics can partly be explained with gravity-type variables. Copyright � 2010 Blackwell Publishing Ltd.

Changing Business Models in International Bank Funding

“…Hence, banks are expected to tap foreign funding markets when interest rates in those markets are lower than those in their home markets, in principle when hedged for exchange rate risk. Indeed, Blank and Buch (2010) find that larger interest rate differentials between countries increase the foreign liabilities of banks. Therefore, ceteris paribus, higher interest rates in the borrowing country represent an incentive for banks to seek more funding abroad.…”

“…Macroeconomic and financial conditions were important drivers as well. Global banking developed because of profit opportunities in destination countries, interest rate differentials, and search for yield (Blank and Buch 2010;Bremus and Fratzscher 2015; The rapid advance of global banking has also had important repercussions for funding and liquidity management at the institutions involved. Financial globalization has allowed banks to tap funding sources across borders, allowing them to diversify away from traditional funding sources to international interbank markets (Fender and McGuire 2010).…”

Does financial connectedness predict crises?

“…The BIS locational statistics have been used extensively to analyse geographical patterns in financial linkages (Hattori andSuda 2007, Minoiu and, financial integration (Kalemli-Ozcan et al 2013) and factors associated with capital flows Buch 2007, Blank andBuch 2010). The data represent foreign exposures of banks in BIS-reporting countries vis-a-vis residents (borrowers) in all other countries.…”

Drivers of Cross-Border Banking in Sub-Saharan Africa

“…From a theoretical perspective, Bruno and Shin (2013) have highlighted how the cross-border capital flows of banks are driven by the leverage cycle of global banks, providing empirical evidence that these global factors dominate other local factors. Most studies have taken instead an empirical perspective, tracing a country's financial integration to macroeconomic characteristics such as trade openness, the level of financial development, and per capita income (Lane and Milesi-Ferretti, 2008), or documenting banks' international portfolios and cross-border lending respond -at least in the long term -to economic conditions in the originating and recipient country, such as trade links, a common language, or market size a common language (Blank and Bush, 2010;Cerruti et al, 2015), and by institutional and policy variables such as regulations, capital controls, and macroprudential policies (Houston et al, 2012;Cerruti and Zhou, 2018).…”