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The Two Faces of Cross-Border Banking Flows Dennis Reinhardt (Bank of England) and Steven J. Riddiough (Warwick Business School) IMF/DNB conference on International Banking: Microfoundations and Macroeconomic Implications 12-13 June 2014 The

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SLIDE 1

The Two Faces of Cross-Border Banking Flows

Dennis Reinhardt (Bank of England) and Steven J. Riddiough (Warwick Business School) IMF/DNB conference on International Banking: Microfoundations and Macroeconomic Implications

12-13 June 2014

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SLIDE 2

The views expressed are those of the authors and do not necessarily reflect those of the Bank of England and members of its Monetary and Financial Policy Committees.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 2 / 38

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Introduction

Cross Border Bank to Bank Funding Losses since Lehman

−40 −20 20 40 Cumulative changes 2008 Q4 to 2009 Q2 (%)

Japan Australia Italy Canada Spain Norway Ireland United States UK Germany Sweden Switzerland France Luxembourg Denmark Turkey South Korea Austria Chile India Brazil Netherlands Belgium

(A) In per cent of own stock

154

−40 −30 −20 −10 Cumulative changes 2008 Q4 to 2009 Q2 (%)

Japan Australia Italy Spain Canada Norway India United States Chile Brazil Turkey Germany Korea Sweden Austria Denmark France UK Ireland Switzerland Netherlands Belgium Luxembourg

(B) In per cent of GDP

  • Wide cross-country dispersion of losses in total bank to bank

funding following Lehman’s collapse

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 3 / 38

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Introduction

Why the cross-country heterogeneity?

  • Why did not all banking systems experience a withdrawal in gross

cross-border bank-to-bank funding as global risk increased?

  • One explanation: composition of banking systems’ external

funding

  • Cross-border bank-to-bank funding can be decomposed into two

distinctive forms:

1 Arms-length (interbank) funding that takes place between unrelated banks 2 Related (intragroup) funding that takes place between global parent banks

and their foreign affiliates

  • This paper: Do these two funding types show a different behaviour

around fluctuations in global risk? ⇒ Is therefore the mix of banking systems’ funding a key determinant of losses in aggregate funding?

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 4 / 38

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Introduction

Interbank vs Intragroup Funding

  • Rich literature on determinants of aggregate cross-border funding between
  • banks. Bruno and Shin (2014) suggest that both intragroup and interbank

funding are withdrawn when global risk is high

  • But some key differences:
  • Interbank funding could be used as a beneficial source of bank

monitoring (Calomiris and Kahn, 1991; Calomiris, 1999) and may alleviate liquidity shocks caused by depositor withdrawals (Goodfriend and King, 1998)

  • But information asymmetries may be larger for interbank funding than

for intragroup funding leading to inefficient withdrawals (Huang and Ratnovski, 2011, Gorton and Metrick, 2012, Brunnermeier, 2009).

  • Internal capital markets: global parent banks have the power to shift

liquidity where it is most needed (Cetorelli and Goldberg, 2012).

  • Volatile intragroup: European banks recycled US wholesale funds

intragroup back to head office in Europe (BIS, 2010; McGuire and von Peter, 2009)

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 5 / 38

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Introduction

Interbank and Intragroup funding since Lehman

−30 −20 −10 10 Cumulative Change in Funding (Median, %)

2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 Intragroup funding Interbank funding

Note: Cumulative median (exchange rate adjusted) change in intragroup or interbank funding across 25 advanced and emerging market banking systems in per cent of 2008 Q2 stocks

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 6 / 38

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Introduction

Contribution

1 Interbank and Intragroup funding show a markedly different

behaviour in periods of high and rising global risk

  • Intragroup funding rises when global risk increases and remains stable

during periods of high global risk

  • Interbank funding is withdrawn with EMEs particularly vulnerable
  • Economic Significance: The mix of banking system’s interbank and

intragroup funding alone can explain up to 45% of the change in aggregate cross-border funding following the collapse of Lehman Brothers.

  • Data: BIS International Banking Statistics by Nationality to disaggregate

banking flows into interbank and intragroup

2 Implications of results for theory? Test of the predictions of

Bruno and Shin (2014) for disaggregated (interbank and intragroup) banking flows

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 7 / 38

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Introduction

Contribution

3 Disaggregating intragroup funding further:

  • Increased funding to parent banks when global risk is high
  • No evidence of significantly reduced intragroup funding to foreign affiliates

⇒ Policy makers need to monitor the decomposition of bank funding to avoid a misleading assessment of risks to financial stability ⇒ Debate on financial protectionism has recently focused on intragroup flows/internal capital markets (Goldberg and Gupta, 2013)

  • Results caution against ringfencing policies that restrict intragroup flows
  • But: In countries where foreign affiliates dominate intragroup funding, the

stability benefits of stable intragroup funding are counteracted by increased intragroup lending to parents.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 8 / 38

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Introduction

Outline

1 Literature 2 Data 3 Method and Results 4 Conclusion

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 9 / 38

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Literature

Outline

1 Literature 2 Data 3 Method and Results 4 Conclusion

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 10 / 38

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Literature

Literature: Cross-border banking flows

  • Determinants of aggregate (interbank + intragroup) banking

flows

  • Cetorelli and Goldberg (2011) examine the transmission of liquidity

shocks from AEs to EMEs via cross-border and local bank lending

  • See also: Van Rijckeghem and Weder, 2001, 2003; Cerutti and

Claessens, 2013; Herrmann and Mihaljek, 2013; Kleimeier, Sander, and Heuchemer, 2013; Bruno and Shin, 2014; Cerutti, Claessens, and Ratnovski, 2014.

  • ⇒ We instead test the predictions of Bruno and Shin (2014) for

disaggregated banking flows

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 11 / 38

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Literature

Literature: Intragroup funding

  • Country- or event-specific evidence
  • Cetorelli and Goldberg (2012a): U.S. parent banks smooth economic

shocks at home by channeling funding from their foreign affiliates

  • Hoggarth, Hooley, and Korniyenko (2013): Intragroup lending by foreign

affiliates resident in the U.K. increased strongly following Northern Rock

  • Schnabl (2012): global banks maintained intragroup funding to Peruvian

affiliates following the Russian financial crisis, but withdrew funding from non-affiliates banks

  • See also Correa, Sapriza, and Zlate (2011), Aiyar (2011), Cetorelli and

Goldberg (2012b)

  • Cross-country evidence
  • De Haas and van Lelyveld (2014) find foreign affiliates extended less credit

domestically than domestic banks in recent financial crisis suggesting that, unlike in previous crises (their 2010 paper), parent banks were unable to support their foreign affiliates

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 12 / 38

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Data

Outline

1 Literature 2 Data 3 Method and Results 4 Conclusion

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 13 / 38

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Data

Data: Banking Flows

  • BIS Locational Statistics by Nationality
  • Intragroup funding: Liabilities to ’related foreign offices’
  • Interbak funding: Liabilities to ’Other banks’
  • Source of funding: rest of the world (i.e no bilateral data)
  • Nationality dimension. Example: intragroup funding of

German-owned banks resident in the UK by their parents or other related offices abroad.

  • Sample: 25 BIS reporting banking systems that report interbank

and intragroup data (19 AEs, 6 EMEs)

  • 1998 Q1 to 2011 Q4

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 14 / 38

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Data

Data: Banking Flows

Dependent variable: Per cent change in cross-border interbank or intragroup funding: ∆Lj

i,t = N

  • k=1

F j

i,k,t N

  • k=1

Sj

i,k,t−1

× 100, (1)

  • F denotes the (exchange rate adjusted) flow of interbank or intragroup funding (i=1,2),

reported by the BIS, while S denotes the previous-quarter stock of interbank or intragroup funding.

  • j = 1, 2, .., 25, denotes the 25 BIS reporting countries who provide the BIS with both

interbank and intragroup data on their resident banks, and k = 1, 2, ..., N, refers to the N countries of ultimate bank origin/nationality which have banking operations in country j.

Three dependent variables (example for j=UK):

1 Funding to banks of all nationalities resident in the UK (sum over all k) 2 Funding to UK owned banks resident in the UK (parent banks; k = UK) 3 Funding to non-UK owned banks resident in the UK (foreign affiliate; k = UK)

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 15 / 38

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Data

Data: Economic and Financial Data

  • Resident banks’ book equity
  • Median return on book equity (Net Income/Total Equity) across all

resident banks

  • Data do not include equity of foreign branches since they are not

required to hold equity

  • VIX - Global Risk
  • Chicago Board Options Exchange
  • Implied volatility compiled from prices of short-dated options on the

S&P 500 index

  • Adjustments
  • LHS and domestic RHS variables are winsorised at the 2.5% level

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 16 / 38

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Data

Summary Statistics

Variables Mean Std.dev. Min Max Obs. Interbank Liabilities (% Change) 2.06 11.37

  • 23.03

33.35 1,178 Intragroup Liabilities (% Change) 4.2 16.88

  • 30.95

58.27 1,178

  • Intragroup funding more volatile than interbank

funding (11.4 vs 16.8 % standard deviation)

  • Correlation between quarterly growth in intragroup and

interbank funding = -.0071

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 17 / 38

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Data

Banking systems’ funding mix

20 40 60 80 100 % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Share of intragroup funding (1998−2011 Average, %) Share of parents in intragroup funding (1998−2011 Average, %)

Note: Country specific data are confidential and hence anonymized.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 18 / 38

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Data

Funding mix and aggregate funding after Lehman

−20 −15 −10 −5

Cumulative Change in Funding (Median, %)

2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 High share of intragroup funding mainly to parents (A1) High share of intragroup funding mainly to foreign affiliates (A2) Low share of intragroup in total funding (B)

Note: Per cent changes in aggregate (interbank + intragroup) cross-border funding between banks

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 19 / 38

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Results

Outline

1 Literature 2 Data 3 Method and Results 4 Conclusion

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 20 / 38

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Results

Empirical Predictions: Bruno and Shin (2014)

  • Bruno and Shin (2014) provide a theoretical model of global

bank funding of regional banks by global banks based on models of credit risk (Vasicek, 2002; Merton, 1974)

  • Global banks can diversify away idiosyncratic risk but

not global risk → Link between global bank leverage and global risk

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 21 / 38

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Results

Empirical Predictions: Bruno and Shin (2014)

Aggregate cross-border funding of regional banks by global banks:

L = F(Global and regional bank equity, spread, global and regional leverage)

(-) Level and Change in Global Risk

  • Global bank leverage = F(global risk)
  • Adrian and Shin (2010): Global risk (VIX) and broker dealer leverage are

negatively correlated (+) Return on domestic bank equity: a rise in the value of regional bank book equity reduces the probability of default (+) IR Spreads: A rise in the ratio between regional and global interest rates reduces default probability of regional bank: more lending (-) Exchange Rate Depreciation: a local currency depreciation increases the value

  • f FX denominated liabilities and pushes the regional bank towards its default

boundary

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 22 / 38

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Results

Empirical Methodology

Panel regression with country level fixed effects: ∆Lj

i,t = βi,0 + βi,1 · V IXt−1 + βi,2 · ∆V IXt

+

  • 3
  • l=1

βi,l+2 · TCV j

l,t−1

  • + αj + Controls + ǫi,t

(2)

  • ∆Li,j,t is the quarterly percentage change in either interbank or intragroup

funding in country j at time t

  • V IX is the average level of the logged VIX index during the quarter
  • ∆V IX is the quarterly change in the average level of the log VIX index.
  • TCV are theoretically-motivated control variables: return on domestic bank

book equity, foreign exchange returns and interest rate differentials

  • Domestic Controls: Inflation, Real GDP Growth, Public Debt (Change), Stock

Volatility

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 23 / 38

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Results

Baseline Results

(1) (2) (3) (4) (5) (6)

Interbank Intragroup

VIX

  • 5.10***
  • 5.22***
  • 5.20***
  • 0.08

0.32 0.97 (1.11) (1.18) (1.09) (1.12) (1.29) (1.47) ∆VIX

  • 3.69*
  • 3.94*
  • 4.04*

4.41** 5.32** 4.09* (1.88) (1.97) (2.03) (2.02) (2.21) (2.39) Return on Equity 0.13*** 0.13*** 0.08** 0.20*** 0.18*** 0.14** (0.03) (0.03) (0.03) (0.04) (0.04) (0.05) FX Return

  • 12.15**
  • 12.98***
  • 24.02**
  • 24.70**

(5.16) (3.98) (8.71) (9.37) ∆IR Spread 1.09 0.93

  • 0.26
  • 0.98

(0.66) (0.70) (1.18) (1.25) Inflation

  • 0.10
  • 0.74

(0.32) (0.58) GDP Growth 0.15***

  • 0.08

(0.05) (0.09) ∆Public Debt

  • 0.73**
  • 0.13

(0.32) (0.51) Stock Volatility 0.02

  • 0.08

(0.04) (0.08) Constant 16.27*** 16.53*** 15.86*** 3.05 1.84 4.25 (3.49) (3.72) (3.65) (3.52) (4.03) (4.64) Observations 1,172 1,142 1,088 1,172 1,142 1,088 R-squared 0.06 0.07 0.08 0.04 0.04 0.05 Countries 25 25 25 25 25 25

Dependent variable: quarterly percent change in either interbank or intragroup funding

  • A rise in the VIX index from 25 to 45 reduces interbank funding by 22%

but increases intragroup funding by 2.5%.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 24 / 38

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Results

Advanced v Emerging Market Economy Banking Systems

(1) (2)

Interbank Intragroup

VIX

  • 4.14***

1.18 (1.22) (1.31) VIX*EME

  • 7.40**
  • 1.31

(2.77) (5.97) VIX+VIX*EME

  • 11.54***
  • 0.14

p-value 0.0001 0.9823 ∆VIX

  • 3.37

5.23*** (2.26) (1.78) ∆VIX*EME

  • 4.66
  • 9.06

(4.22) (8.87) ∆VIX+∆VIX*EME

  • 8.03**
  • 3.83

p-value 0.0346 0.6648 ROE 0.10*** 0.18*** (0.03) (0.04) ROE*EME

  • 0.16
  • 0.90***

(0.15) (0.31) ROE+ROE*EME

  • 0.06
  • 0.72**

p-value 0.6975 0.0275 Other TCV Y Y Controls Y Y Observations 1,088 1,088 R-squared 0.09 0.07 Countries 25 25 Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 25 / 38

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Results

Advanced v Emerging Market Economy Banking Systems

(1) (2)

Interbank Intragroup

VIX

  • 4.14***

1.18 (1.22) (1.31) VIX*EME

  • 7.40**
  • 1.31

(2.77) (5.97) VIX+VIX*EME

  • 11.54***
  • 0.14

p-value 0.0001 0.9823 ∆VIX

  • 3.37

5.23*** (2.26) (1.78) ∆VIX*EME

  • 4.66
  • 9.06

(4.22) (8.87) ∆VIX+∆VIX*EME

  • 8.03**
  • 3.83

p-value 0.0346 0.6648 ROE 0.10*** 0.18*** (0.03) (0.04) ROE*EME

  • 0.16
  • 0.90***

(0.15) (0.31) ROE+ROE*EME

  • 0.06
  • 0.72**

p-value 0.6975 0.0275 Other TCV Y Y Controls Y Y Observations 1,088 1,088 R-squared 0.09 0.07 Countries 25 25 Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 26 / 38

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Results

Advanced v Emerging Market Economy Banking Systems

(1) (2)

Interbank Intragroup

VIX

  • 4.14***

1.18 (1.22) (1.31) VIX*EME

  • 7.40**
  • 1.31

(2.77) (5.97) VIX+VIX*EME

  • 11.54***
  • 0.14

p-value 0.0001 0.9823 ∆VIX

  • 3.37

5.23*** (2.26) (1.78) ∆VIX*EME

  • 4.66
  • 9.06

(4.22) (8.87) ∆VIX+∆VIX*EME

  • 8.03**
  • 3.83

p-value 0.0346 0.6648 ROE 0.10*** 0.18*** (0.03) (0.04) ROE*EME

  • 0.16
  • 0.90***

(0.15) (0.31) ROE+ROE*EME

  • 0.06
  • 0.72**

p-value 0.6975 0.0275 Other TCV Y Y Controls Y Y Observations 1,088 1,088 R-squared 0.09 0.07 Countries 25 25 Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 27 / 38

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Results

Advanced v Emerging Market Economy Banking Systems

(1) (2)

Interbank Intragroup

VIX

  • 4.14***

1.18 (1.22) (1.31) VIX*EME

  • 7.40**
  • 1.31

(2.77) (5.97) VIX+VIX*EME

  • 11.54***
  • 0.14

p-value 0.0001 0.9823 ∆VIX

  • 3.37

5.23*** (2.26) (1.78) ∆VIX*EME

  • 4.66
  • 9.06

(4.22) (8.87) ∆VIX+∆VIX*EME

  • 8.03**
  • 3.83

p-value 0.0346 0.6648 ROE 0.10*** 0.18*** (0.03) (0.04) ROE*EME

  • 0.16
  • 0.90***

(0.15) (0.31) ROE+ROE*EME

  • 0.06
  • 0.72**

p-value 0.6975 0.0275 Other TCV Y Y Controls Y Y Observations 1,088 1,088 R-squared 0.09 0.07 Countries 25 25 Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 28 / 38

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Results

Economic Significance: Funding during the global financial crisis

  • Can the relative importance of intragroup funding explain changes in

aggregate funding following the collapse of Lehman Brothers?

  • First an example simulation. Two banking systems: A, B with a stock of

cross-border liabilities of 100

  • Only difference: share of intragroup funding in total bank to bank funding.
  • A: 20%
  • B: 80%
  • Scenario similar to global financial crisis 2008 Q4 to 2009 Q2: VIX rises from

25 to 45 and stays there for two quarters.

Banking System A Banking System B Quarter Interbank Intragroup Total Interbank Intragroup Total 2008 Q3 80 20 100 20 80 100 2008 Q4 62.3 20.5 82.7 15.6 81.9 97.5 2009 Q1 49.9 20.5 70.4 12.5 81.9 94.4 2009 Q2 40.1 20.5 60.5 10 81.9 91.9

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 29 / 38

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Results

Economic Significance: Funding during the global financial crisis

  • Simulations using actual data: predicted vs. actual change in

aggregate funding

AT NL DK BE DE IE LU ES GB US NO FR AU IT SE JP CH CA

Predicted change in funding not distinguishing between inter and intra

−40 −30 −20 −10 10 20 30 Actual Change in Funding (%) −40 −35 −30 −25 −20 −15 −10 −5 Predicted Change in Funding (%)

AEs with systemtic banking crisis AEs without systemic banking crisis

Note: Systemic banking crisis from Laeven and Valencia (2013) Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 30 / 38

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Results

Economic Significance: Funding during the global financial crisis

  • What is the explanatory power of a banking system’s

funding mix?

  • Cross-sectional regressions:

∆Lj = β0 + β1 · IntraSharej + ǫj, (3)

  • ∆L is the percent change in aggregate funding (interbank plus intragroup) after

Lehman’s collapse (i.e. between 2008Q4 and 2009Q2) relative to the pre-crisis stock (i.e. 2008Q3)

  • IntraSharej pre-crisis share of intragroup funding in aggregate funding
  • Different samples: 1) All countries 2) AEs with systemic banking crisis (Laeven

and Valencia, 2013) 3) AEs without systemic banking crisis

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 31 / 38

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Results

Economic Significance: Funding during the global financial crisis

(1) (2) (3)

All countries AEs with systemic AEs without systemic banking crisis banking crisis

Share of intragroup funding 0.21** 0.34** 0.04 (0.09) (0.12) (0.14) Constant

  • 20.10***
  • 31.61***
  • 2.00

(4.64) (6.99) (6.23) Observations 23 10 8 R-squared 0.12 0.45 0.00

  • A country which experienced a systemic banking crisis and held no

intragroup funding would have witnessed a drop in aggregate funding exceeding 30% (Col. 2)

  • If the same country held all funding intragroup it would have witnessed a

small inflow

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 32 / 38

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Results

Intragroup Funding: Parents v Foreign Affiliates

(1) (2) (3) (4)

Parents Foreign Affiliates

VIX 3.90* 4.69**

  • 1.81
  • 0.76

(2.25) (2.20) (1.36) (1.48) VIX*EME

  • 8.86*
  • 6.84

(4.99) (5.47) VIX+VIX*EME

  • 4.17
  • 7.60

p-value 0.3808 0.1545 ∆VIX 4.66 7.97* 2.52 1.92 (4.17) (4.05) (2.83) (3.08) ∆VIX*EME

  • 27.12***

1.18 (8.12) (3.79) ∆VIX+∆VIX*EME

  • 19.15***

3.10 p-value 0.0092 0.2346 ROE 0.23*** 0.26*** 0.09 0.12 (0.06) (0.06) (0.10) (0.10) ROE*EME

  • 0.15
  • 1.06***

(0.49) (0.31) ROE+ROE*EME 0.11

  • 0.94***

p-value 0.8265 0.0065 Other TCV Y Y Y Y Controls Y Y Y Y Observations 919 919 922 922 R-squared 0.05 0.05 0.04 0.06 Countries 20 20 20 20

Note: The dependent variable is the quarterly percentage change in intragroup funding of either parent or foreign affiliate banks.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 33 / 38

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Results

Intragroup Funding: Parents v Foreign Affiliates

(1) (2) (3) (4)

Parents Foreign Affiliates

VIX 3.90* 4.69**

  • 1.81
  • 0.76

(2.25) (2.20) (1.36) (1.48) VIX*EME

  • 8.86*
  • 6.84

(4.99) (5.47) VIX+VIX*EME

  • 4.17
  • 7.60

p-value 0.3808 0.1545 ∆VIX 4.66 7.97* 2.52 1.92 (4.17) (4.05) (2.83) (3.08) ∆VIX*EME

  • 27.12***

1.18 (8.12) (3.79) ∆VIX+∆VIX*EME

  • 19.15***

3.10 p-value 0.0092 0.2346 ROE 0.23*** 0.26*** 0.09 0.12 (0.06) (0.06) (0.10) (0.10) ROE*EME

  • 0.15
  • 1.06***

(0.49) (0.31) ROE+ROE*EME 0.11

  • 0.94***

p-value 0.8265 0.0065 Other TCV Y Y Y Y Controls Y Y Y Y Observations 919 919 922 922 R-squared 0.05 0.05 0.04 0.06 Countries 20 20 20 20

Note: The dependent variable is the quarterly percentage change in intragroup funding of either parent or foreign affiliate banks.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 34 / 38

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Results

Robustness

  • Removing individual countries
  • Alternative measures of global risk
  • Accounting for the global financial crisis and European

sovereign debt crisis

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 35 / 38

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Conclusion

Outline

1 Literature 2 Data 3 Method and Results 4 Conclusion

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 36 / 38

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Conclusion

Conclusion I

  • Some banking systems lost more cross-border bank-to-bank

funding than others during the global financial crisis

  • But not all types of bank funding are equally risky:

Intragroup funding more stable than interbank funding when global risk is high

  • The mix of banking system’s interbank and intragroup funding alone can

explain up to 45% of the change in aggregate cross-border funding following the collapse of Lehman Brothers.

  • Disaggregating intragroup funding: increased funding to

parent banks but no evidence of significantly reduced intragroup funding to foreign affiliates

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 37 / 38

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SLIDE 38

Conclusion

Conclusion II

⇒ Implications for theory? ⇒ Policy makers need to monitor the decomposition of bank funding to avoid a misleading assessment of risks to financial stability ⇒ The results caution against ringfencing policies that restrict intragroup flows. But in countries where foreign affiliates dominate intragroup funding, the stability benefits of stable intragroup funding are counteracted by increased intragroup lending to parents.

Reinhardt and Riddiough The Two Faces of Cross-Border Banking Flows June 2014 38 / 38