Bilateral Financial Linkages and Global Imbalances: A Viewon the Eve of the Financial Crisis

Abstract

We present a novel and comprehensive dataset of bilateral gross and net external positions in various financial instruments for the main advanced and emerging economies and regions, designed to improve our understanding of cross-border financial linkages. The data show no strong correspondence between country or region pairs with the largest gross versus net external positions, and the importance of international financial centers, including offshore centers, in intermediating financial flows. We also highlight some important data gaps in completing a network of cross-border holdings, related to the limited available information on the size and geographical pattern of external claims and liabilities of offshore centers, oil exporters, and other mostly emerging markets.

Financial Globalisation and the Crisis

“…In addition, it is also not straightforward to identify the " ultimate" owner of various foreign assets, especially in countries with large international financial centres (see also Milesi-Ferretti et al 2010). For instance, the United Kingdom reported losses on holdings of US asset-backed securities during 2008.…”

The Missing Wealth of Nations: Are Europe and the U.S. net Debtors or net Creditors?*

“…Since the problem was identified in the 1970s, the International Monetary Fund has commissioned a number of reports to investigate its causes, and national statistical agencies have put considerable resources into improving their data. Yet despite a great deal of progress, large anomalies remain; many European securities, in particular, have no identifiable owner (Milesi-Ferretti, Strobbe, and Tamirisa, 2010).…”

Global Banks and Crisis Transmission

“…In contrast to most previous works, we examine the effect of both direct and indirect via financial centers exposure to the U.S. financial system. As argued in detail by Milesi-Ferretti et al (2010), most available data on bilateral external positions (and our data) are based on the concept of residence-the guiding principle of balance of payments statistics-they overstate exposure to and from small financial centers (and understate exposure to the U.S. and the U.K.). 8 To deal with indirect exposure to the U.S. via financial centers, we construct a lower and upper bound for the exposure to the U.S. As a lower bound we use direct banking linkages between each country-pair and the U.S. As an upper bound we add exposure to the direct exposure linkages to the Cayman Islands.…”

“…See Milesi-Ferretti et al (2010) and Kubelec and Sa (2010) not (directly at least) reflect the volatility of output growth and, therefore, allows us to identify the impact of banking integration on the covariation of output growth. Another benefit of this index is that, as we do not have many post crisis observations, the rolling average correlation measures are not very well estimated (see Doyle and Faust (2006)).…”