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...
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