The distance effect in banking and trade

Brei, Michael; Peter, Goetz von

doi:10.1016/j.jimonfin.2017.10.002

Cited by 49 publications

(57 citation statements)

References 45 publications

(73 reference statements)

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“…In an OLS setting, the squared correlation equals the traditionally defined R-square. The R-square of our model outperforms similar attempts in the literature, such as Houston, Lin, and Ma (2012), and is close to the results obtained from trade gravity equation (Brei and von Peter, 2017;Helpman, Melitz, and Rubinstein, 2008).…”

Section: Appendix Appendix a Additional Estimation Resultssupporting

confidence: 87%

“…More recently, Karolyi, Sedunov, and Taboada (2017), using BIS Consolidated Banking Statistics and a gravitational model as part of their estimations, find that recipient countries benefit from cross-border bank lending through improved financial stability. Brei and von Peter (2017) use BIS Locational Banking Statistics to show that similar to gravity models in trade, distance plays a significant role in bank gravity estimations, even if the physical demands of bank lending are less stringent than that of trade.…”

Section: Literature Review and Contributionsmentioning

confidence: 99%

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The Global Banking Network: What is Behind the Increasing Regionalization Trend?

Cerutti

Zhou²

2018

IMF Working Papers

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This paper analyses the nature of the increasing regionalization process in global banking. Despite the large decline in aggregate cross-border banking lending volumes, some parts of the global banking network are currently more interlinked regionally than before the Global Financial Crisis. After developing a simple theoretical model capturing banks' internationalization decisions, our estimation shows that this regionalization trend is present even after controlling for traditional gravitational variables (e.g. distance, language, legal system, etc.), especially among lenders in EMs and non-core banking systems, such as Australia, Canada, Hong Kong, and Singapore. Moreover, this regionalization trend was present before the GFC, but it has increased since then, and it seems to be associated with regulatory variables and the opportunities created by the retrenchment of several European lenders.

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Section: Appendix Appendix a Additional Estimation Resultssupporting

confidence: 87%

Section: Literature Review and Contributionsmentioning

confidence: 99%

The Global Banking Network: What is Behind the Increasing Regionalization Trend?

Cerutti

Zhou²

2018

IMF Working Papers

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“…The gravity model of trade has been widely used to analyse the effect of trade liberalization policies and reductions of trade costs on bilateral trade flows. It has also been broadly applied to the analysis of other international flows such as FDI (Bénassy-Quéré et al, 2007;Demekas et al, 2005), international migration (Mayda, 2010;Lewer and van den Berg, 2008) and equity holding and cross border banking (Portes and Rey, 2005;and Brei and Von Peter, 2018). Its application to the analysis of international remittances has been less common, but analogous to the concept of gravity in trade, bilateral remittance flows can also be mainly explained by the economic mass of the countries involved in the transaction, and relative frictions that limit the volume of transactions captured by transaction cost.…”

Section: Model Specificationmentioning

confidence: 99%

Sending Money Home: Transaction Cost and Remittances to Developing Countries

2020

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Remittances, the part of the migrant's income sent back to their family living in the origin country, have become a critical stepping-stone to economic development for many developing nations. A key factor that causes migrants to use informal channels is the high cost of transferring funds through formal channels. Reducing the cost of remitting is one of the 2030 Sustainable Development Goals; it is also an important policy objective as it helps to bring remittances into the formal economy, enhances financial inclusion and increases the net income of receiving households. This study examines the question of whether and to what extent the reduction in the cost of remittances increases the flow of remittances to developing countries, and whether larger amounts are remitted when the cost per transaction decreases (the so-called scale effect). It uses bilateral data on remittance flows and exploits a novel dataset covering transaction costs for 30 sending and 75 receiving countries for the period 2011-2017. A gravity model of remittance flows is estimated using panel data and instrumental variable techniques to account for potential endogeneity. We find that transaction cost is a significant predictor of the volume of formal remittances. A 1 percent decrease in the cost of remitting USD 200 leads to about a 1.6 percent increase in remittances. This association remains unchanged regardless of the models used and techniques employed. In addition to this strong impact of transfer fees, migrant stock, exchange rate stability in the recipient country and financial development in both the recipient and sending countries are also found to be important factors driving remittances. The findings suggest that policies designed to increase remittances need to focus on decreasing the cost of remitting through formal channels.

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“…On foreign banks, Mian (2006) finds that they rely relatively more on hard information while applying more conservative lending standards. As highlighted by Brei and von Peter (2018), the role of distance remains substantial for cross-border lending, even though transport costs are immaterial. Similar to Lane and Milesi-Ferretti (2008) and Lane (2006) for equity and bond holdings, we find a strong positive relationship between trade and cross-border bank lending.…”

Section: Introductionmentioning

confidence: 99%

Banking Across Borders

Cerutti¹,

Koch²,

Pradhan³

2020

IMF Working Papers

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We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter cross-border bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks’ lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.

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The distance effect in banking and trade

Cited by 49 publications

References 45 publications

The Global Banking Network: What is Behind the Increasing Regionalization Trend?

The Global Banking Network: What is Behind the Increasing Regionalization Trend?

Sending Money Home: Transaction Cost and Remittances to Developing Countries

Banking Across Borders

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