Discussion Global Liquidity and Drivers of Cross-Border bank Flows discussion by Anastasia Kartasheva (BIS) The views expressed in the paper are those of the authors and do not necessarily represent the views of BIS. Amsterdam, 13 June 2014
Discussion Research questions � Global liquidity and cross-border …nancing conditions are driven by supply factors � Where do global liquidity supply factors originate? � Does supply depend on the …nancial and monetary policy conditions of the source economies? � What characteristics a¤ect the recipient economy exposure to variation of global liquidity? � These are important questions. But also di¢cult.
Discussion Summary of the paper: Methodology � BIS IBS Locational data: exposure of a country to the rest of the world � Distinguish between cross-border ‡ows to banks and non-banks � banks are somewhat homogeneous � non-banks category includes very diverse institutions: other …nancials (insurance, hedge funds), corporates � Liquidity supply factors in source economies � uncertainty and risk (VIX), funding conditions for global banks (TED spread, US dealer bank and S4 bank leverage), money aggregates in S4, monetary policy in S4 (level and term structure of interest rates), …nancial regulation
Discussion Summary of the paper: Key …ndings � Base regression results � cross-border bank ‡ows increase when uncertainty is lower, leverage is higher, US interest rates are lower, yield curve is more ‡at � results are more pronounced for 2001-2012, consistent with …nancial integration e¤ects � The role of US vs other S4 drivers � non-US S4 factors are important � regional e¤ects are important, but VIX e¤ects are important beyond their regions � Borrowers’ countries policies � some factors increase the growth in cross-border claims on banks and non-banks: quality of institutions � but other factors decrease it: stricter bank capital regulation, capital controls, ‡exible exchange rate regime
Discussion How does it compare to other studies on global liquidity? � "First phase" of global liquidity research � empirical regularities between ease of funding/leverage indicators and fund ‡ows � "Second phase" of global liquidity research � possible mechanisms behind statistical regularities: international transmission of monetary policy, VaR constraints, collateral requirements through the cycle � "Third phase" of global liquidity research � assessment of the ine¢ciencies/vulnerabilities and design of policy responses
Discussion Comments � How do funds ‡ow? � Interest rate di¤erential and currency composition � Di¤erent types of fund ‡ows and their interaction recipient’s regulation/institutions
Discussion How funds ‡ow? � Role of …nancial centers � Regional e¤ects: Too little of too much integration? � What is the source economy? � US does not seem to be a source economy � The funds that come to the US from Euro area could have originated in Japan � Funds ‡ow from country A to B. Does it depend on conditions in country C?
Discussion Interest rate di¤erential and currency composition � The currency composition of ‡ows varies across countries � Interest rate re‡ects: credit risk, growth, currency risk � Regional e¤ects
Discussion Types of ‡ows and institutions/regulations � Sources of credit to non-banks � direct cross border credit : non-banks in a country can borrow directly from non-resident banks (or issue bonds targeted at non-resident investors) � indirect cross border credit : resident banks borrow from non residents, either banks or non-banks � foreign currency denominated credit : credit extended by banks either inside or outside the country � Country dependency on banking should matter � Caveat: some of non-banks (other …nancials) can intermediate the funds through the country � These sources of credit are substitutable � How do regulations a¤ect the composition of ‡ows? Can stricter supervision of banks help?
Discussion Policy implications � Level of ‡ows: too high or too low? � Volatility of ‡ows: too high or too low? � Composition of ‡ows: how does it a¤ect the exposures to capital out‡ows? � How should rules and regulations be designed to balance di¤erent objectives?
Linkages in the international banking system US dollar stocks linkages at Q1 2010 1 Euro stocks linkages at Q1 2010 1 CH Euro CH Euro Other Em Euro Other Em Euro UK UK US JP US US JP Carib FC Asia FC Carib FC Asia FC Lat Am Asia-Pac Lat Am Asia-Pac Oil Oil US - Carib FC: $3.7 tn Euro - UK: $3.5 tn US - UK: $2.5 tn Euro - US: $0.3 tn US - Euro: $1.3 tn Euro - CH: $0.3 tn Cumulative net flows (Q1 2000–Q2 2007)² Cumulative net flows (Q3 2007–Q1 2010)² CH Euro CH Euro Other Em Euro Other Em Euro UK UK US JP US JP Carib FC Asia FC Carib FC Asia FC Lat Am Asia-Pac Lat Am Asia-Pac Oil Oil UK - US: $600bn US - UK: $709bn JP - Euro: $260bn US - Carib FC: $438bn Carib FC - US: $245bn UK - Euro: $437bn Asia FC = Asian financial centres (Hong Kong SAR, Macao and Singapore); Asia-Pac = China, Chinese Taipei, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines and Thailand; Carib FC = Caribbean financial centres (Aruba, the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles and Panama); CH = Switzerland; Em Euro = emerging Europe (Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia, Turkey and Ukraine); Euro = euro area member states excluding Slovakia, Slovenia, Cyprus and Malta; JP = Japan; Lat Am = Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela; Oil = OPEC member states (excluding Indonesia) plus Russia; Other = Australia, Canada, Denmark, New Zealand, Norway and Sweden; UK = United Kingdom; US = United States. 1 The size of each circle is proportional to the stock of cross-border claims and liabilities of reporting banks located in the particular geographical region. Some regions include non-reporting countries. The thickness of a line between regions A and B is proportional to the sum of claims of banks in A on all residents of B, liabilities of banks in A to non-banks in B, claims of banks in B on all residents of A and liabilities of banks in B to non-banks in A. ² Exchange rate adjusted flows, expressed at constant end-Q1 2010 exchange rates. The thickness of an arrow is proportional to the amount of net bank flows between regions, and is comparable across panels. An arrow points from A to B if net flows in this direction are positive, calculated as changes in net interbank claims (assets minus liabilities) of banks in A on banks in B, plus net claims of banks in A on non-banks in B, minus net claims of banks in B on non-banks in A. (This last component is missed if B is not a reporting country.) See “Tracking international bank flows”, BIS Quarterly Review , December 2006. Sources: BIS locational banking statistics by residence; authors’ calculations. Graph A 73 BIS Quarterly Review, September 2010
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