INTERNATIONAL BANK FLOWS TO EMERGING MARKETS: INFLUENCE OF SOVEREIGN CREDIT RATINGS AND THEIR REGIONAL SPILLOVER EFFECTS

We examine whether changes in sovereign credit assessments help determine international bank flows to emerging countries. We focus on the bank flows of G7 countries to a sample of 55 emerging market borrowers for 1995–2008. We find evidence indicating that sovereign credit rating revisions have significant and positive influences on international bank flows from developed markets even after controlling for other determinants. In addition, we find strong regional rating spillover effects. Ratings improvements in one emerging market region tend to reduce bank flows to the other regions. However, there is an exception from the Asia Pacific to Eastern Europe.     

Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned since Lehman Brothers?

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank‐specific characteristics affect the functioning of the credit market in an economy‐wide crisis. We investigate how bank and bank–firm relationship characteristics have influenced interest rate setting since the collapse of Lehman Brothers. We find that interest rate spreads increased by less for those borrowers having closer lending relationships. Furthermore, firms borrowing from banks endowed with large capital and liquidity buffers and from banks engaged mainly in traditional lending were kept more insulated from the financial crisis.     

Banks' Liquidity and the Cost of Liquidity to Corporations

We consider the liquidity shock banks experienced following the collapse of the asset‐backed commercial paper (ABCP) market in the fall of 2007 to investigate whether banks' liquidity conditions affect their ability to provide liquidity to corporations. We find that banks that borrowed more from the Federal Home Loan Bank system or the Federal Reserve's discount window following that liquidity shock passed a larger portion of their borrowing costs onto corporations seeking access to liquidity when compared to the precrisis period. This increase is larger among banks with a bigger exposure to the ABCP market, credit lines that pose more liquidity risk to banks, and borrowers that are likely dependent on the credit‐line provider. Our findings show that the crisis that affected the banking system had a negative effect not only on the price of credit to corporations, but also on the price corporations pay to guarantee access to liquidity.     

How effective are macroprudential policies? An empirical investigation

In recent years, policymakers have generally relied on macroprudential policies to address financial stability concerns. However, our understanding of these policies and their efficacy is limited. In this paper, we construct a novel index of macroprudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately. The effectiveness of these policies in curbing credit growth and house price appreciation is then assessed using a dynamic panel data model. The main findings of the paper are: (1) Macroprudential policies have been used far more actively after the global financial crisis in both advanced and emerging economies. (2) These policies have primarily targeted the housing sector, especially in the advanced economies. (3) Macroprudential policies are usually changed in tandem with bank reserve requirements, capital flow restrictions, and monetary policy. (4) Our analysis suggests that macroprudential tightening is associated with lower bank credit growth, housing credit growth, and house price appreciation. (5) Targeted policies – for example, those specifically intended to limit house price appreciation – seem to be more effective, especially in economies where bank finance is important.     

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.     

The International Transmission of Bank Liquidity Shocks: Evidence from an Emerging Market

I exploit the 1998 Russian default as a negative liquidity shock to international banks and analyze its transmission to Peru. I find that after the shock international banks reduce bank‐to‐bank lending to Peruvian banks and Peruvian banks reduce lending to Peruvian firms. The effect is strongest for domestically owned banks that borrow internationally, intermediate for foreign‐owned banks, and weakest for locally funded banks. I control for credit demand by examining firms that borrow from several banks. These results suggest that international banks transmit liquidity shocks across countries and that negative liquidity shocks reduce bank lending in affected countries.     

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

This paper examines the role of nonfundamentals‐based sentiment in house price dynamics, including the well‐documented volatility and persistence of house prices during booms and busts. To measure and isolate sentiment's effect, we employ survey‐based indicators that proxy for the sentiment of three major agents in housing markets: home buyers (demand side), home builders (supply side), and lenders (credit suppliers). After orthogonalizing each sentiment measure against a broad set of fundamental variables, we find strong and consistent evidence that the changing sentiment of all three sets of market participants predicts house price appreciation in subsequent quarters, above and beyond the impact of changes in lagged price changes, fundamentals, and market liquidity. More specifically, a one‐standard‐deviation shock to market sentiment is associated with a 32–57 basis point increase in real house price appreciation over the next two quarters. These price effects are large relative to the average real price appreciation of 71 basis points per quarter observed over the full sample period. Moreover, housing market sentiment and its effect on real house prices is highly persistent. The results also reveal that the dynamic relation between sentiment and house prices can create feedback effects that contribute to the persistence typically observed in house price movements during boom and bust cycles.     

房价波动、金融稳定与最优宏观审慎政策

本文通过构建包含家庭住房抵押借款摩擦和银行贷款摩擦的动态随机一般均衡模型,重点考察了异质性冲击下房价波动对金融稳定的影响。研究发现,房价上涨会导致银行风险溢价及杠杆率显著上升,进而加剧金融体系的内在不稳定。为降低房价波动及维护金融稳定,选取两类宏观审慎政策工具进行逆周期调控实验,结果表明,在住房需求冲击下,金融管理部门应选取贷款价值比政策,且应对房贷积极调控,而对房价进行中性调控。在最终产品部门生产率冲击、房地产部门生产率冲击及跨期偏好冲击下,应选取资本充足率政策,但对房贷和房价调控力度的把握则存在差异。本研究为厘清房价波动对金融稳定的动态传导机制,以及金融管理部门如何选取宏观审慎政策工具以稳定房价并降低系统性金融风险提供了启示。     

The Great Recession: US dynamics and spillovers to the world economy

This paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980-2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent “Great Recession” episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.     

The Impact of House Prices on Consumer Credit: Evidence from an Internet Bank

This paper shows that house price fluctuations can have a significant impact on credit availability. Data from Prosper.com, a peer‐to‐peer lending site that matches borrowers and lenders to provide unsecured consumer loans, indicate that homeowners in states with declining house prices experience higher interest rates, greater credit rationing, and faster delinquency. We find especially large effects for subprime borrowers whose balance sheets are likely most exposed to asset price declines. This evidence suggests that asset price fluctuations can play an important role in determining credit conditions and are thus a potentially significant mechanism for propagating macroeconomic shocks.     

What Drives the Owner‐Occupied and Rental Housing Markets? Evidence from an Estimated DSGE Model

Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner‐occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price‐rent ratio.     

Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central,Eastern, and Southeastern Europe

Several countries in Central, Eastern, and Southeastern Europe used a rich set of prudential instruments during the recent credit and housing boom and bust cycles. We construct a comprehensive database of these policy measures covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. The measures that appeared to be effective were capital measures (minimum capital adequacy ratio, maximum ratio of lending to households to share capital) and nonstandard liquidity measures (marginal reserve requirements (MRRs) on foreign funding, MRRs linked to credit growth).     

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.     

Bank regulation,property prices and early warning systems for banking crises in OECD countries

Early warning systems (EWS) for banking crises generally omit bank capital, bank liquidity and property prices. Most work on EWS has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent. We estimate logit crisis models for OECD countries, finding strong effects from capital adequacy and liquidity ratios as well as property prices, and can exclude traditional variables. Higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities, implying long-run benefits to offset some of the costs that such regulations may impose.     

Noncore Bank Liabilities and Financial Vulnerability

A lending boom is reflected in the composition of bank liabilities when traditional retail deposits (core liabilities) cannot keep pace with asset growth and banks turn to other funding sources (noncore liabilities) to finance their lending. We formulate a model of credit supply as the flip side of a credit risk model where a large stock of noncore liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis. We find supporting empirical evidence in a panel probit study of emerging and developing economies.     

Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows

We employ a structural global VAR model to analyze whether U.S. unconventional monetary policy shocks, identified through changes in the central bank’s balance sheet, have an impact on financial and economic conditions in emerging market economies (EMEs). Moreover, we study whether international capital flows are an important channel of shock transmission. We find that an expansionary policy shock significantly increases portfolio flows from the U.S. to EMEs for almost two quarters, accompanied by a persistent movement in real and financial variables in recipient countries. Moreover, EMEs on average respond to the shock with an easing of their own monetary policy stance. The findings appear to be independent of heterogeneous country characteristics like the underlying exchange rate arrangement, the quality of institutions, or the degree of financial openness.     

Is sovereign risk related to the banking sector?

We examine whether the banking sector within a nation is related to sovereign risk. We hypothesize that more competitive and sophisticated financial systems are less prone to panics or bank runs, and consequently will be associated with superior sovereign credit ratings. Using Ordered Probit with Aggregate Time Effects methodology, our results show that banking sector characteristics such as concentration in the banking system, liquidity of bank assets, and size of financial system are significantly related to sovereign credit ratings. Since the use of these sovereign ratings is ubiquitous in international finance in varied applications such as determination of the cost of international borrowing by governments, international cost of capital for FDI, and others, the relationships identified in this paper have important public policy implications.     

Procyclical Capital Regulation and Lending

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.     

Correlated leverage and its ramifications

This paper develops a theory in which housing prices, the capital structures of banks (mortgage lenders) and the capital structures of mortgage borrowers are all endogenously determined in equilibrium. There are four main results. First, leverage is a “positively correlated” phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks, and higher house prices lead to higher leverage for both. The intuition is that first-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values on bank loans, inducing banks to be more highly levered. Second, higher bank leverage leads to greater house price volatility in response to shocks to fundamental house values. Third, a bank’s exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks’ pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two main results. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.     

Hot money in bank credit flows to emerging markets during the banking globalization era

This paper investigates the relative importance of hot money in bank credit and portfolio flows from the US to 18 emerging markets over the period 1988–2012. We deploy state-space models à la Kalman filter to identify the unobserved hot money as the temporary component of each type of flow. The analysis reveals that the importance of hot money relative to the permanent component in bank credit flows has significantly increased during the 2000s relative to the 1990s. This finding is robust to controlling for the influence of push and pull factors in the two unobserved components. The evidence supports indirectly the view that global banks have played an important role in the transmission of the global financial crisis to emerging markets, and endorses the use of regulations to manage international capital flows.