Bilateral adjustment of bank assets: Boom and bust

Abstract

This paper provides evidence that bilateral factors were relevant for the adjustment of bank assets before and during the Great Recession. This finding is consistent with the theory that monitoring costs or informational frictions can help explain the adjustment of bank assets at a bilateral country level. Distance is a particularly relevant friction, and has non-uniform effects for advanced and emerging hosts. If the assets are denominated in domestic rather than foreign currency, this can reduce the negative effect of distance on adjustment. Further we find that trade, colonial ties and the history of a position are important for the bilateral adjustment of bank assets.

Bilateral Capital Flows: Transaction Patterns and Gravity

“…Galstyan and Lane (2013), Galstyan, Lane, Mehigan, and Mercado (2016), Hellmanzik and Schmitz (2017), Lane and Milesi-Ferretti (2005a), and Lee (2008) show the same positive covariation between colonial ties, legal origins and common language; and portfolio holdings. Aviat and Coeurdacier (2007), Blank and Buch (2007), Buch (2005), Coeurdacier and Martin (2009), and Mehigan (2016) find countries with common language, legal origins, and colonial ties have higher bilateral bank claims and liabilities; while Daude and Fratzscher (2008) showed similar results across different types of assets.…”

“…1 See Aviat and Coeurdacier (2007), Blank and Buch (2007), Buch (2005), Coeurdacier and Martin (2009), Daude and Fratzscher (2008), Head and Reis (2008), Galstyan and Lane (2013), Galstyan, Lane, Mehigan, and Mercado (2016), Hellmanzik and Schmitz (2017), Milesi-Ferretti (2005a and2005b), Lee (2008), Mehigan (2016), andPapaioannou (2009). 1 2 This paper addresses these gaps in the literature.…”

“…Galstyan and Lane (2013), Galstyan, Lane, Mehigan, and Mercado (2016), Hellmanzik and Schmitz (2017), Milesi-Ferretti (2005a and2005b), and Lee (2008) use bilateral portfolio asset holdings from the International Monetary Fund's Coordinated Portfolio Investment Survey (CPIS). Aviat and Coeurdacier (2007), Blank and Buch (2007), Buch (2005), and Mehigan (2016) employ bilateral bank claims and liabilities from BIS Banking Statistics, while Daude and Fratzscher (2008) construct a comprehensive data set which includes all types of asset holdings such as direct, portfolio equity, portfolio debt, and bank loans. 3 2 In contrast, Okawa and van Wincoop (2012) derived a theoretical gravity equation where bilateral asset holdings depend on the product of economic size variables and relative frictions.…”

“…The notion that information asymmetries can affect indirect barriers to asset trade is in line withAhearne, Griever, and Warnock (2004) andOkawa and van Wincoop (2012).5 They include di Giovanni (2005) for foreign direct investment;Galstyan and Lane (2013),Galstyan, Lane, Mehigan, and Mercado (2016),Hellmanzik and Schmitz (2017),Milesi-Ferretti (2005a and2005b) andLee (2008) for portfolio holdings;Aviat and Coeurdacier (2007),Blank and Buch (2007),Coeurdacier and Martin (2009), andMehigan (2016) for bank holdings;Duade and Fratzscher (2008) for all types of holdings;Portes and Rey (2005) for equity flows; andHerrmann and Mihaljek (2013) for bank flows.…”

Bilateral capital flows: Transaction patterns and gravity

“…Galstyan and Lane (2013), Galstyan, Lane, Mehigan, and Mercado (2016), Hellmanzik and Schmitz (2017), Milesi-Ferretti (2005a and2005b), and Lee (2008) use bilateral portfolio asset holdings from the International Monetary Fund's Coordinated Portfolio Investment Survey (CPIS). Aviat and Coeurdacier (2007), Blank and Buch (2007), Buch (2005), and Mehigan (2016) employ bilateral bank claims and liabilities from BIS Banking Statistics, while Daude and Fratzscher (2008) construct a comprehensive data set which includes all types of asset holdings such as direct, portfolio equity, portfolio debt, and bank loans. 3 2 In contrast, Okawa and van Wincoop (2012) derived a theoretical gravity equation where bilateral asset holdings depend on the product of economic size variables and relative frictions.…”