Cross-Border Banking and Global Liquidity

We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders throu...

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Bibliographic Details
Published in:The Review of economic studies 2015-04, Vol.82 (2 (291)), p.535-564
Main Authors: BRUNO, VALENTINA, SHIN, HYUN SONG
Format: Article
Language:English
Subjects:
Bank liquidity
Banking industry
Capital movement
Capital movements
Cross border transactions
Financial leverage
International banking
Studies
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Summary:We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
ISSN:0034-6527
1467-937X
DOI:10.1093/restud/rdu042