What Determines the Composition of International Bank Flows Cornelia - - PowerPoint PPT Presentation

What Determines the Composition of International Bank Flows

Cornelia Kerl and Friederike Niepmann Vania Stavrakeva (LBS, Discussant)

Amsterdam, 13 June, 2014

Motivation

A microfounded model that determines the composition of lending by categories:

inter-bank lending intra-bank lending via subsidiaries/branches cross-border lending to foreign firms

Deep parameters determining the composition of lending:

relative real returns in both countries relative efficiency of the banking sectors in both countries (measured as relative

monitoring costs)

frictions: related to opening subsidiary/branch (fixed cost) and related to direct

lending abroad (fixed cost plus higher monitoring costs)

Focus: how does changing frictions related to direct lending of foreign banks or

intra-bank lending affect the composition of flows and amount of loans?

Some nice empirical evidence from German data

Road Map

Discussion of Results and Suggestions Big Picture Comments and Policy Suggestions

Comments: Theory and Interpretation of Results

Comments 1: No imperfect competition

Despite the rich microstructure, still a bit stylized model... Hard to discuss the effect of frictions to entry in a model with perfectly competitive

banking sector (no monopolistic externalities)

Entry costs will affect the degree of competitiveness and, as a result, overall

capitalization, lending and borrowing of the banking sector Average Bank Concentration vs Market Power

Comments: Theory and Interpretation of Results

Comment 2: No explicit welfare but welfare related statements:

Inter-bank lending is worse since more unstable in empirical evidence (side note:

unstable funding need not be an inefficient outcome...)

However, in the model, nothing makes one type of lending worse than the other

(perfect substitutes)

"Implicit" welfare trade-off : higher costs of foreign bank entry lead to...

reduced overall efficiency of banking sector and misallocation of resources but also decreased inter-bank flows, which decreases unstable inflows

What’s missing in the "implicit" welfare analysis? In a model with imperfect competition, barriers to entry...

decrease competitiveness and push towards underinvestment might make banks more stable by increasing franchise value of banks (Hellman,

Murdock, Stiglitz 2000)

Type of inflows vs transmission channel of inflows

Comment 3: What is more relevant for policy — type of inflows vs transmission channel of inflows?

The types of loans far from perfect substitutes – for example, carry type

short-term loans vs FDI type loans

If imperfect substitutes, contraction of intra-bank and direct firm loans might lead

to expansion of inter-bank loans BUT also compositional shift of inter-bank loans

Whether higher inter-bank lending in response to larger entry barriers is a concern

will depend on changes in inter-bank loan composition, if any

Check in the data what happens with the composition of inter-bank loans as more

barriers to entry introduced Dissect the data further:

Look at maturity structure Sensitive of loans to industry TFP measure vs excess carry returns Interact this classification of the type of lending with inter-bank, intra-bank or

direct lending

Comments: Empirical Contribution

Comment 4. Empirics

Generalizing the empirical results beyond Germany tricky since asset/liability side

and net flows of countries differ a lot

Model should match data in more than one country Why do the empirics with changes in relative rather than absolute inflows? The measures of financial frictions used in empirics focuses on costs to establishing

subsidiaries/branches or direct foreign lending to firms

Can look at capital account controls as well and augment the model to generate

the relevant comparative statics

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

1.1 If carry inflows, dilemma not trilemma (Rey 2014) – lose some monetary policy independence plus higher volatility

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

1.1 If carry inflows, dilemma not trilemma (Rey 2014) – lose some monetary policy independence plus higher volatility 1.2 If FDI type loans – potential overinvestment due to pecuniary externalities (only if monopolistic externality is not strong enough); for example, overinvestment in real estate

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

1.1 If carry inflows, dilemma not trilemma (Rey 2014) – lose some monetary policy independence plus higher volatility 1.2 If FDI type loans – potential overinvestment due to pecuniary externalities (only if monopolistic externality is not strong enough); for example, overinvestment in real estate

• 2. Should the main focus be on inter-bank vs intra bank vs direct loans?

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

1.1 If carry inflows, dilemma not trilemma (Rey 2014) – lose some monetary policy independence plus higher volatility 1.2 If FDI type loans – potential overinvestment due to pecuniary externalities (only if monopolistic externality is not strong enough); for example, overinvestment in real estate

• 2. Should the main focus be on inter-bank vs intra bank vs direct loans?

2.1 Not necessarily — more interested in the type of loans — short term (carry) vs FDI like loans

Big Picture Comments

• 1. Should we worry about excess cross border inflows?

1.1 If carry inflows, dilemma not trilemma (Rey 2014) – lose some monetary policy independence plus higher volatility 1.2 If FDI type loans – potential overinvestment due to pecuniary externalities (only if monopolistic externality is not strong enough); for example, overinvestment in real estate

• 2. Should the main focus be on inter-bank vs intra bank vs direct loans?

2.1 Not necessarily — more interested in the type of loans — short term (carry) vs FDI like loans 2.2 The precise financial structure will be still relevant to flesh out the exact sources of externality and to address regulation if excess inflows

Policy recommendation guideline:

Policy Guideline

Policy recommendation guideline:

Policy Guideline

• 1. For a specific country, check which type of inflows (short vs long, carry vs FDI)

mostly channelled via inter-bank, intra-bank and direct lending

Policy recommendation guideline:

Policy Guideline

• 1. For a specific country, check which type of inflows (short vs long, carry vs FDI)

mostly channelled via inter-bank, intra-bank and direct lending

• 2. Depending on country specific factors, establish which types of inflows pose main

danger (if any) or if there is underinvestment

Policy recommendation guideline:

Policy Guideline

• 1. For a specific country, check which type of inflows (short vs long, carry vs FDI)

mostly channelled via inter-bank, intra-bank and direct lending

• 2. Depending on country specific factors, establish which types of inflows pose main

danger (if any) or if there is underinvestment

• 3. Choose whether to regulate and how to regulate inter-bank, intra-bank or direct

lending depending on the answers in 1 & 2

Policy recommendation guideline:

Policy Guideline

• 1. For a specific country, check which type of inflows (short vs long, carry vs FDI)

mostly channelled via inter-bank, intra-bank and direct lending

• 2. Depending on country specific factors, establish which types of inflows pose main

danger (if any) or if there is underinvestment

• 3. Choose whether to regulate and how to regulate inter-bank, intra-bank or direct

lending depending on the answers in 1 & 2

• 4. Realize that in most cases, political constraints and information constraints will

make steps 1,2 and 3 irrelevant...