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Financial stress in lender countries and capital outflows from emerging market economies

Ilhyock Shim and Kwanho Shin ()

No 745, BIS Working Papers from Bank for International Settlements

Abstract: We investigate if financial stress in countries where international banks are headquartered is a major driver of banking outflows from emerging market economies (EMEs). We find that when financial stress measured by sovereign or bank CDS spread or corporate bond spread increases, international banks decrease their lending to EMEs, which acts as a major driver of capital outflows from EMEs. In particular, financial stress in lender countries is a more important driver than the local financial conditions and macroeconomic fundamentals of EMEs. Such results generally hold even after the Global Financial Crisis (GFC) period, but to a lesser extent. When we divide the total amount of international lending into subcomponents, cross-border lending to EMEs is more susceptible to financial stress in lender countries than is local lending, and that local lending in foreign currency is more stable than is cross-border lending. Our findings suggest that it is desirable for EME policymakers to promote diversification of lender countries and induce more borrowing from local subsidiaries than cross-border lenders.

Keywords: capital outflows; cross-border claims; emerging market economies; financial stress; local claims (search for similar items in EconPapers)
JEL-codes: E44 F15 F21 F34 F38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2018-09
References: View references in EconPapers View complete reference list from CitEc
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