Running for the Exit: International Banks and Crisis Transmission

1. Running for the Exit: International Banks and Crisis Transmission Comments by Vedran Šošić Financial Stability Department Croatian National Bank

2. Goal of the paper • Explores the role of cross-border lending in crisis transmission. • Observes the impact of different forms and intensities of financial integration on the stability of capital flows during the crisis: • How did the bank involvement with the country impact on change in it’s lending during the crisis.

3. Main findings and conclusions • It’s important to build a relationship. • The extent of cooperation with local banks positively correlated with stability of lending. • Having a subsidiary also helps. • IF YOU’RE GOING TO GLOBALIZE, DO IT TO THE FULL EXTENT!!! • More integration is better than less integration.

4. Overall paper assessment • Topic hugely important in today’s world. • Product of a long lasting research effort in international banking. • Quite an enjoyable reading. • Impressive presentation: • Provides clear and concise description of research (and there is lot of it!!!). • Paper seems like an experienced conference attendee: • Huge section on robustness issues.

5. Specific issues – data • Available data used close to full: • Combines different data sources in a clever way. • However, DEALOGIC dataset not used to the full extent: • Data aggregated by host countries. • Authors express reservations regarding BIS dataset: • How well the two datasets correspond on a country-pair basis? • Several data definitions used for robustness, but all treat changes in small and large exposures alike: • What would results look like if change in exposures is observed (as % of host country banking assets, GDP, or some other scaling variable)? Change in loan stocks rather than loan flows? What if change in flows is scaled?

6. Fundamental issues (I) • Paper concentrates on cross-border lending as a major channel of influence in a globalized financial setting. • What about other possible channels of influence? • E.g. reputation risks. • Bad news about parent institutions may trigger run on their subsidiaries.

7. Fundamental issues (II) • Consensus in macro-finance is getting more tolerant for some forms of capital controls: • How to reconcile it with the findings of the paper? • The paper assumes away most of the demand effects: • Focus is on the determinants of supply. • What was the role of relationships in building macro imbalances which fed into recessions? • What if potential destabilizing effects of excessive capital inflows due to closer relationship for some countries dominates it’s stabilizing effect during the crisis?

8. Fundamental issues (III) • Paper claims that information issues are at the center of the cross-border dynamics: • Results do not follow thoroughly such approach. • Lending to subsidiaries did not act as a buffer – it was rather lending to the corporate sector! • Was is because subsidiaries were able to meet depressed loan demand, on because parents did not want to stand by their subsidiaries („functional distance“)?

9. Fundamental issues (IV) • What about the credit risk? • Does direct cross-border lending to the corporate sector magnify or diminish the frequency of default? • If probability of default for cross-border loans is higher than for domestic loans, switch to the corporate sector lending during the crisis may deteriorate overall loan quality.

10. Some remaining questions • Characteristics of banks in host countries play no role in the model: • Admittedly, this is somewhat intertwined with the demand effects, but not fully. • Do the efforts to make banking systems in host countries more resilient make sense from the standpoint of stabilizing capital inflows? • Or, would more resilient domestic banks make cross-border borrowing unnecessary when loan demand is depressed? • How to facilitate integration of the corporate sector in international banking networks? • (know some ways, but would not unconditionally advise those)

11. A note on pricing of loans • Explanatory variables hardly explain any variation in loan pricing. • Probably the consequence of omitting host country specific variables – in this case country risk.

12. Some political economy • Was it advantageous for the home countries to restrict the volume of cross border lending? • If it was advantageous, deeper integration may eventually backfire. • Would geographical proximity in the future be more important than regulatory regime in home country? The main lesson of the paper may be “chose your parents wisely”. • But can policymakers really choose between the parents?

13. … and some suggestions for robustness check! • In analysis of financial stability (stress tests), it is customary to look at what’s beyond the 97th percentile, not to abstract from it. • We may learn important things by looking at the worst case scenarios – just look at stress testing exercises! • Did any of the parent institutions cut loose some of their subsidiaries during the crisis? • To what effect? • What if some of parent banks collapses?

14. Thank you!