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Hilton Atlanta, 305
International Banking, Economics, and Finance Association
Bank Lending and Cross-border Flows
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Larry Wall, Federal Reserve Bank of Atlanta
Beyond Home Bias: Portfolio Holdings and Information Heterogeneity
AbstractWe investigate whether information frictions are important determinants of banks’ international portfolio holdings. Going beyond the classic distinction of home versus foreign assets, we study the heterogeneity within foreign holdings. First, we document that banks invest only in a few foreign countries. This is true, especially for small banks. Large banks invest in more countries, but they still underweight foreign assets. Existing models with information frictions cannot rationalize these facts as they imply that investors still hold all foreign assets for diversiﬁcation purposes, regardless of the size of the portfolio. Second, we propose a new model with a two-tiered information cost structure that includes both a ﬁxed and a variable component, that leads to ‘sparse’ portfolios. We ﬁnd strong support for the key predictions of the model in the data: if a bank acquires information about a country, it is more likely to hold debt of that country. Moreover, more optimistic and more precise forecasts predict larger portfolio holdings.
Are Banking and Capital Markets Union Complements? Evidence from Channels of Risk Sharing in the Eurozone
AbstractThe interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, “direct” banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
Bank Use of Sovereign CDS in the Eurozone Crisis: Hedging and Risk Incentives
AbstractUsing a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to government default risk during the sovereign debt crisis period. Less loan exposure to sovereign risk is associated with more protection selling in CDS, the effect being weaker when sovereign risk is high. Bank and country risk variables are mostly not associated with protection selling. The findings are driven by the actions of a few non-dealer banks, which sold aggressively at the onset of the crisis and started covering their positions at its height. The results suggest that the increasing shift in bank loan books towards sovereign bonds and loans over the course of the crisis caused reductions to their sovereign CDS exposure.
Bank of Spain
De Nederslandsche Bank
- G2 - Financial Institutions and Services
- F3 - International Finance