Cross-Border Banking and Global Liquidity

Valentina Bruno and Hyun Song Shin

The Review of Economic Studies, 2015, vol. 82, issue 2, 535-564

Abstract: 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.

Date: 2015
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Working Paper: Cross-border banking and global liquidity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:82:y:2015:i:2:p:535-564

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