The Two Faces of Cross-Border Banking Flows

44 Pages Posted: 23 Apr 2014 Last revised: 20 Aug 2015

See all articles by Dennis Reinhardt

Dennis Reinhardt

Bank of England

Steven Riddiough

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

Date Written: July 19, 2015

Abstract

We examine the determinants of cross-border interbank and intra-group funding across crisis and non-crisis periods. Using a previously unexplored data set spanning 25 banking systems, we find aggregate intra-group funding is unrelated to fluctuations in either global or local macroeconomic fluctuations, while flightier interbank funding responds pro-cyclically to both worldwide and domestic economic trends. This feature of the data means intra-group funding remains comparatively stable when global conditions deteriorate -- even during the global financial crisis. During `normal' times we find intra-group funding responds counter-cyclically to global interest rate changes, with parent banks using affiliates to offset tighter global funding conditions. More generally, we find intra-group funding has a closer relationship with domestic banking system profitability and solvency, being used to support banks in weaker banking systems during the global financial crisis.

Keywords: Cross-border banking flows, global risk, parent banks and foreign affiliates

JEL Classification: F32, F34, G21

Suggested Citation

Reinhardt, Dennis and Riddiough, Steven, The Two Faces of Cross-Border Banking Flows (July 19, 2015). Available at SSRN: https://ssrn.com/abstract=2427644 or http://dx.doi.org/10.2139/ssrn.2427644

Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Steven Riddiough (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

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