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Cross-Border (Non-)Banking

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Cortez Hill B
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Diana Bonfim, Bank of Portugal and Catholic University of Portugal

Bank Complexity, Governance, and Risk

Ricardo Correa
,
Federal Reserve Board
Linda Goldberg
,
Federal Reserve Bank of New York

Abstract

Complexity is assumed to raise costs of bank resolution on failure and have systemic externalities. Recognizing that being too complex to fail could be viewed as implying implicit government subsidies, the Dodd-Frank Act implemented more stringent capital and liquidity requirements, and more resolution planning to both reduce the probability of failure and externalities from failure should it occur. While the banking organization is operating, complexity can have adverse consequences due to agency problems or positive consequences due to diversification benefits and improved liquidity management, including through using internal capital markets. Our analysis considers how different forms of complexity map to individual bank and bank holding company risks, specifically isolating the components associated with agency problems versus those with liquidity risk diversification, differentiating between the organizational, business, and geographic complexity of US Banks. Regulatory reforms specifically associated with recovery and resolution, appear to have reduced organizational complexity for targeted banks, but these changes in complexity have not been translated into a reduction in bank risk so far.

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?

Jin Cao
,
Norges Bank
Valeriya Dinger
,
University of Osnabrück

Abstract

We empirically analyze how bank lending reacts to monetary policy in the presence of global financial flows. Employing a unique and novel dataset in structurally identified regressions, we show that the efficiency of the bank lending channel is affected when banks can shift to international funding and thus insulate their costs of funding from domestic monetary policy. We isolate the effects of global factors from domestic monetary policy by focusing on exchange rates deviations from the prediction of interest rate parities, and find the effects even pass through to non-international banks via domestic interbank lending.

Regulatory Arbitrage and Cross-Border Syndicated Loans

Asli Demirguc-Kunt
,
World Bank
Balint Horvath
,
University of Bristol
Harry Huizinga
,
Tilburg University and CEPR

Abstract

This paper investigates how international regulatory and institutional differences affect lending in the cross-border syndicated loan market. Lending provided through a foreign subsidiary is subject to subsidiary-country regulation and institutional arrangements. Multinational banks' choices between loan origination through the parent bank or through a foreign subsidiary provide information about these banks' preferences to operate in countries with varying regulations and institutions. Our results indicate that international banks originated larger loan volumes in countries with less stringent capital regulations consistent with regulatory arbitrage before the financial crisis. The results from estimating a conditional logit model of banks' choices of the country of loan origination also confirm that there was regulatory arbitrage before the financial crisis. Further, higher-quality institutions related to creditor rights and the rule of law promote loan origination volumes as well as location.

Catering through Globalization: Cross-Border Expansion and Misallocation in the Global Mutual Fund Industry

Si Cheng
,
Chinese University of Hong Kong
Massimo Massa
,
INSEAD
Hong Zhang
,
Tsinghua University

Abstract

Efficient financial globalization should reward high-skilled financial institutions and punish low-skilled institutions. We show that the globalization of the mutual fund industry in the beginning of the century has exhibited the opposite pattern: low-skilled companies can benefit from globalization by catering to the demand of unsophisticated investors for foreign investment. This catering strategy attracts capital for fund companies but fails to deliver performance or diversification benefits to investors. Moreover, its associated cross-border capital flows reduce price efficiency and liquidity in the target country. Our results highlight the potential existence of a short-term behavioral component of financial globalization in distorting efficiency.
Discussant(s)
Katheryn Russ
,
University of California-Davis
Linda Goldberg
,
Federal Reserve Bank of New York
Wilko Bolt
,
De Nederlandsche Bank
Teng Wang
,
Federal Reserve Board
JEL Classifications
  • G2 - Financial Institutions and Services
  • F3 - International Finance