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Global Banks and Financial Stability in Emerging Economies

초록/요약

-Three Essays on Global Banks and Financial Stability in Emerging Economies- This study is composed of three essays related to the global banks and financial stability in emerging economies. We focus on the importance of foreign affiliates’ funding structure in emerging economies both in times of crisis and in normal times. Our study would provide the evidence that the difference between locally funding affiliates and affiliates which engage in cross-border funding is manifest, particularly during the financial crisis. In this respect, we confirm in a systematic manner some of the descriptive evidence offered by other studies favoring local liabilities to cross-border funding. Part Ⅰ: The Influence of Foreign Bank Presence and Its Funding Structure on Capital Inflows: Evidence from Emerging Economies This study analyzes the role of foreign banks in stabilizing capital flows. Based on a sample of 110 emerging countries during 1995-2009, we find that the strong presence of multinational bank’s subsidiaries is associated with capital inflows at normal times although subsidiaries access local financing sources via deposits. We also find that the presence of foreign banks is neither a guarantee as to stability for external financing during local financial turmoil, nor a channel through which credit crunch in advanced economies transmitted to emerging economies. Instead, we conclude that the relation between capital flows and foreign bank presence importantly depends on subsidiaries’ funding structure. Specifically, foreign banks may contribute to financial stability during the crises only in countries where subsidiaries of banking group rely more on local deposit funding. On the contrary, their dependence on cross-border borrowing exacerbates the transmission of the systemic shock as the share of foreign banks in local banking system increases. In terms of policy implication, our results suggest that it is very important for national supervisory institution to monitor balance sheet items, especially liability side for the purpose of assessing foreign banks’ adverse effect on capital flows. Part Ⅱ: Are Funding Strategy and Bank Risk Different between Greenfield and Takeover?: Evidence from Bulgarian Banks This paper examines the implications of entry mode of foreign banks and funding strategy for default risk using data on Bulgarian banks during 2004q2-2014q1. We find that greenfield banks are different from takeover banks in terms of funding strategy. Specifically, greenfield banks rely more on wholesale funding and have larger maturity mismatch between assets and liabilities than takeover banks. This difference with respect to funding strategy leads also to different levels of risk between greenfield banks and takeover banks. This finding suggests that one possible channel for increasing vulnerabilities of greenfield banks may run through excessive reliance of banks on non-deposit funding. The results also imply that currently discussed regulatory standards on the funding structure of banks could mitigate the build-up of vulnerabilities. However, we confirm the existence of a close link between the mode of foreign entry and bank risk even when funding strategy is being controlled for. We interpret this as evidence that takeover banks are more likely to have a competitive advantage, independent of funding structure. Part Ⅲ: Distance, Regional competition and Capital Allocation of U.S. Global banks: Evidence from Emerging Economies In this paper, we study the liquidity management strategy of global banks across countries. By using country-level data for U.S. global banks and their foreign affiliates operating in emerging countries during the period 2006-2013, we find that during the financial crisis global banks do not retrench in an indiscriminate manner, but the severity of retrenchment depends on characteristics specific to parent-affiliates. Our results suggest that global banks clearly consider the positions of the foreign locations where they have operations within the banking group. Most importantly, in contrast to the studies of Cetorelli and Goldberg (2012), we do not find the convincing evidence that when faced with a crisis, global banks draw more support from locations that normally attract local deposits- “local funding markets”. Instead, such locations in emerging economies are hardly affected by or even protected from the deterioration of the global financial market. Notwithstanding, it is expected that the more liberalized and the higher integration, the easier it would be for parent bank to retrench locally generated resources via internal capital markets during the crisis. We also find that global banks are likely to diversify their portfolios across regions rather than across countries. This suggests that market integration within the region reduces the scope for the global diversification of investments due to highly correlated business cycles and returns.

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