Global Banks and Systemic Debt Crises

Juan Morelli, Diego Perez and Pablo Ottonello
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Diego Perez: New York University

No 644, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study the role of financial intermediaries in the global market for risky external debt. We first provide empirical evidence measuring the effect of global banks’ net worth on bond prices of emerging-market economies. We exploit within-borrower bond variation and show that, around the collapse of Lehman Brothers, bonds held by more distressed global banks experienced larger price contractions. We then construct a model of global banks’ lending to emerging economies and quantify their role using our empirical estimates and other key data. In the model, banks’ net worths affect bond prices by the combination of a form of market segmentation and banks’ financial frictions. We show that these banks’ exposure to emerging economies is the key to determine their role in propagating shocks. With the current observed exposure, global banks play an important role in transmitting shocks originating in developed economies, accounting for the bulk of the variation of spreads in emerging economies during the recent global financial crisis. Global banks help explain key patterns of debt prices observed in the data, and the evolution of their exposure over the last decades can explain the changing nature of systemic debt crises in emerging economies.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-ifn
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Citations: View citations in EconPapers (13)

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Working Paper: Global Banks and Systemic Debt Crises (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:644

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