What Determines the Composition of International Bank Flows
Cornelia Kerl and Friederike Niepmann
Vania Stavrakeva (LBS, Discussant)
Amsterdam, 13 June, 2014
Motivation
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A microfounded model that determines the composition of lending by categories:
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inter-bank lending
intra-bank lending via subsidiaries/branches
cross-border lending to foreign …rms
Deep parameters determining the composition of lending:
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relative real returns in both countries
relative e¢ ciency of the banking sectors in both countries (measured as relative
monitoring costs)
frictions: related to opening subsidiary/branch (…xed cost) and related to direct
lending abroad (…xed cost plus higher monitoring costs)
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Focus: how does changing frictions related to direct lending of foreign banks or
intra-bank lending a¤ect the composition of ‡ows and amount of loans?
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Some nice empirical evidence from German data
Road Map
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Discussion of Results and Suggestions
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Big Picture Comments and Policy Suggestions
Comments: Theory and Interpretation of Results
Comments 1: No imperfect competition
I Despite the rich microstructure, still a bit stylized model...
I Hard to discuss the e¤ect of frictions to entry in a model with perfectly competitive
banking sector (no monopolistic externalities)
I Entry costs will a¤ect 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:
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Inter-bank lending is worse since more unstable in empirical evidence (side note:
unstable funding need not be an ine¢ cient outcome...)
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However, in the model, nothing makes one type of lending worse than the other
(perfect substitutes)
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"Implicit" welfare trade-o¤ : higher costs of foreign bank entry lead to...
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reduced overall e¢ ciency of banking sector and misallocation of resources
but also decreased inter-bank ‡ows, which decreases unstable in‡ows
What’s missing in the "implicit" welfare analysis?
In a model with imperfect competition, barriers to entry...
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decrease competitiveness and push towards underinvestment
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might make banks more stable by increasing franchise value of banks (Hellman,
Murdock, Stiglitz 2000)
Type of in‡ows vs transmission channel of in‡ows
Comment 3: What is more relevant for policy – type of in‡ows vs transmission
channel of in‡ows?
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The types of loans far from perfect substitutes — for example, carry type
short-term loans vs FDI type loans
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If imperfect substitutes, contraction of intra-bank and direct …rm loans might lead
to expansion of inter-bank loans BUT also compositional shift of inter-bank loans
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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
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Check in the data what happens with the composition of inter-bank loans as more
barriers to entry introduced
Dissect the data further:
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Look at maturity structure
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Sensitive of loans to industry TFP measure vs excess carry returns
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Interact this classi…cation of the type of lending with inter-bank, intra-bank or
direct lending
Comments: Empirical Contribution
Comment 4. Empirics
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Generalizing the empirical results beyond Germany tricky since asset/liability side
and net ‡ows of countries di¤er a lot
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Model should match data in more than one country
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Why do the empirics with changes in relative rather than absolute in‡ows?
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The measures of …nancial frictions used in empirics focuses on costs to establishing
subsidiaries/branches or direct foreign lending to …rms
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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 in‡ows?
Big Picture Comments
1. Should we worry about excess cross border in‡ows?
1.1 If carry in‡ows, dilemma not trilemma (Rey 2014) — lose some monetary policy
independence plus higher volatility
Big Picture Comments
1. Should we worry about excess cross border in‡ows?
1.1 If carry in‡ows, 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 in‡ows?
1.1 If carry in‡ows, 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 in‡ows?
1.1 If carry in‡ows, 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 in‡ows?
1.1 If carry in‡ows, 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 …nancial structure will be still relevant to ‡esh out the exact sources of
externality and to address regulation if excess in‡ows
Policy recommendation guideline:
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Policy Guideline
Policy recommendation guideline:
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Policy Guideline
1. For a speci…c country, check which type of in‡ows (short vs long, carry vs FDI)
mostly channelled via inter-bank, intra-bank and direct lending
Policy recommendation guideline:
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Policy Guideline
1. For a speci…c country, check which type of in‡ows (short vs long, carry vs FDI)
mostly channelled via inter-bank, intra-bank and direct lending
2. Depending on country speci…c factors, establish which types of in‡ows pose main
danger (if any) or if there is underinvestment
Policy recommendation guideline:
I
Policy Guideline
1. For a speci…c country, check which type of in‡ows (short vs long, carry vs FDI)
mostly channelled via inter-bank, intra-bank and direct lending
2. Depending on country speci…c factors, establish which types of in‡ows 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:
I
Policy Guideline
1. For a speci…c country, check which type of in‡ows (short vs long, carry vs FDI)
mostly channelled via inter-bank, intra-bank and direct lending
2. Depending on country speci…c factors, establish which types of in‡ows 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...